The Massachusetts “durable” power of attorney is similar to a power of attorney that is not durable, but there is one huge difference between the two types.  The difference involves whether the agent or attorney-in-fact continues to be empowered to take action for you once you have become disabled.  A power of attorney that is not durable is no longer effective if you become disabled, whereas a “durable” power of attorney continues to be effective even after your disability.

Under the English common law upon which Massachusetts law is based, if you signed a power of attorney naming someone to act on your behalf, the person would have authority only for as long as you remained competent.  If you later became disabled or incompetent, the power of attorney became null and void.  That would mean a court process would then be required for someone to be able to step in and handle your financial affairs upon your disability.  To minimize the need for court involvement by allowing a power of attorney to remain effective after disability or incapacity, decades ago the Massachusetts legislature passed a law (Massachusetts General Laws, Chapter 201B) to allow for the creation of a “durable” power of attorney.  The way to make a power of attorney become durable is to add a phrase that makes it clear that the powers detailed in it remain effective even after disability.

That Massachusetts durable power of attorney laws were changed when part of the Massachusetts Uniform Probate Code took effect on July 1, 2009, and, as I’ve reported in a previous post, Chapter 201B was repealed. (See Is Your Massachusetts Durable Power of Attorney Still Valid?)  Unfortunately, when a law is replaced, actions taken under it are still effective, but when a law is repealed, those actions are treated as though the law was never there. Therefore, any durable power of attorney executed before July 1, 2009 may be invalid, especially if it makes specific reference to Chapter 201B.

The major problem with any durable power of attorney is that it is only as good as the respect it receives from a self-serving bureaucrat. (If you bring money to a bank using a durable power of attorney, you may be greeted with open arms; if you try to take money out of a bank using a durable power of attorney, often you’ll hear that it needs to be reviewed by the bank’s lawyer.) There is never any guarantee that third parties, such as banks or insurance companies, will honor a power of attorney even if it is durable. Such problems often arise when there has been a long passage of time since the power of attorney was executed and it is thought to be “stale.”  Fortunately, the current Massachusetts law addresses this problem by stating that no durable power of attorney ever become stale, and that  if you rely on a power of attorney in good faith, you will not incur any liability if you follow the instructions of the agent or attorney-in-fact.

Unfortunately, the other reason a durable power of attorney may be rejected is based on the specific powers granted to the agent or attorney-in-fact. While theoretically the document need only state that you want to give the power to do absolutely anything, many financial institutions want to see specific powers that pertain to them before they are willing to respect a durable power of attorney.  Therefore, a well-drafted Massachusetts durable power of attorney is often several pages long.

To the extent that a power of attorney is not effective when needed, the only alternative would be to file for conservatorship under the Massachusetts Uniform Probate Code, and that process is time-consuming, detailed, subject to challenge by well-meaning and not-so-well-meaning relatives, and, as you might expect, expensive.  For those reasons, a well-drafted durable power of attorney is often the most important document that a person could execute.

A person who lives is a nursing home is known as a “resident,” not a patient, and it is important to note that the resident is in a nursing “home,” not a nursing “institution.”  Federal law requires that a nursing facility provide “services and activities to attain or maintain the highest practicable physical, mental, and psychosocial well-being of each resident.”  Federal law also requires that a facility must ensure that a resident’s “abilities in activities of daily living do not diminish unless circumstances of the individual’s clinical condition demonstrate that diminution was unavoidable.”  Thus, maintaining a condition, or moderating the rate of decline, should always be a goal of therapy services, even if the resident is not making progress.

Federal Medicaid law requires that a nursing facility “must establish and maintain identical policies and practices regarding transfer, discharge, and the provision of services required under the state plan for all individuals regardless of source of payment.”  Thus, a resident should never be denied the continuation of physical therapy based on the excuse that Medicare will no longer cover it.

Nursing facility residents often are susceptible to transfer trauma in being moved from place to place.  Federal law gives every resident the right to veto any intra-facility transfer.  Medicare certification of a room does not prevent that room from being used for the care of a resident who pays privately or has payment through the MassHealth (i.e., Medicaid) program.

Immediate family or other relatives are not subject to visiting hour limitations or other restrictions unless imposed by the resident.  Federal law requires that a resident’s “immediate family or other relatives” have the right to visit at any time if the resident consents to the visit.  Under federal law, non-family visitors must also be granted “immediate access” to the resident.

Federal law requires that a nursing facility must care for its residents in such a manner and in such an environment as will promote maintenance or enhancement of the quality of life of each resident.”  Federal law also requires that a resident has the right “to reside and receive services with reasonable accommodation of individual needs and preferences, except where the health or safety of the individual or other residents would be endangered.”  A resident has the right to choose activities, schedules, and health care consistent with his or her interests, assessments, and plans of care.

If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,841 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,841 of the married couple’s total income.  All of these figures remain unchanged through June 30, 2012.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home.

I have established a blog to deal solely with Massachusetts pet trust issues. You can find it at http://pettrust.info There are already several posts there about the basic components of an effective Massachusetts Pet Trust, including appointing Trustees, Caretakers (sometimes referred to by others as guardians or caregivers) and Monitors (sometimes referred to by others as pet panels), as well as other basic issues to consider.

Text of the New Massachusetts Law Allowing Establishment of Pet Trusts

Can You Leave a Sum of Money Directly to Your Pet in Your Will?

What Are the Reasons to Establish a Massachusetts Pet Trust?

What Are the Basic Components of a Massachusetts Pet Trust?

With Whom Should You Discuss Your Plans for Your Massachusetts Pet Trust?

Should You Have a Discussion with Your Veterinarian about Your Plan to Establish a Massachusetts Pet Trust?

What are the Key Issues to Consider When Appointing the Trustee of a Massachusetts Pet Trust?

Choosing a Caretaker for Your Pet in Your Massachusetts Pet Trust

Who Should Be the Monitor in Your Massachusetts Pet Trust?

Should Your Massachusetts Pet Trust Be a Provision in your Will, or Should It Be a Separate, Stand-alone Trust?

When Can the Amount in a Massachusetts Pet Trust Be Reduced by the Court?

What Are the Income Tax Issues for Massachusetts Pet Trusts?

Instead of Establishing a Pet Trust, Can You Leave Your Pet to Your Veterinarian or an Animal Shelter?

Establishing a Life Care Plan for Your Pet

To calculate the value of the life estate, you must first determine what the applicable interest rate is. The interest rate in the month of the sale can be found at http://www.tigertables.com/7520.htm. Once you have this figure, you then go to http://www.unclefed.com/IRS-Forms/2001/p1457.pdf and look in Table S for the page displaying tables with that interest rate. Looking up the life tenant’s age on that page will get you the breakdown between the life tenant’s percentage interest in the proceeds and the other parties, who on that page are referred to as the “Remainder.” For further explanation, including an example, see  MassHealth Eligibility Operations Memo 07-18 .

The life tenant’s share of the proceeds can be eligible for the $250,000 capital gains exclusion under Internal Revenue Code Section 121, but often the persons receiving the remainder do not live there and their proceeds are subject to capital gains taxation without the ability to use that exclusion. Thus, it can often be advisable to wait until the life tenant’s death before selling real estate.

Note that the failure of the life tenant to receive the life tenant’s full share of the proceeds is considered a disqualifying transfer of assets under federal Medicaid law and MassHealth regulations, and is subject to the 5-year lookback period.

It’s a good thing that the default provision for the estates of decedents  who died during 2010 is the 2011 federal estate tax law, with its $5,000,000 exemption and automatic step-up in basis for assets includible  in the federal gross estate.  Many estates under $5,000,000 will probably not want to elect to be treated under 2010 law and deal with the uncertainties of what assets are entitled to a step-up in basis, so the unavailability of Form 8939 won’t matter to them.  Unfortunately, estates that want to opt out of 2011 law and elect 2010 law still don’t have access to the form or instructions, or even an estimate from the IRS of when they will be completed.

It was once thought that Form 8939 would be due at the same time as the decedent’s 2010 federal income tax return.  The IRS has recently announced, however, that Form 8939 should not be filed with the decedent’s  final income tax return.  Filers of Form 8939 will be given at least 90 days after the form is eventually finalized to file it, and will have access to information about the form and Internal Revenue Code Section 1022 through future Publication 4895, entitled “Tax Treatment of Property Acquired from a Decedent Dying 2010.”

Currently, many elderly or aging persons do not buy long term care insurance because they feel that they cannot afford it.   Some of them feel that way because they consider their principal to be untouchable, and are concerned whenever any plan causes them to invade it.  A deeper inquiry into their finances often shows that much of their principal would not be needed for anything except paying for the costs of their long-term care.  (They could therefore be considered to be gambling with their principal by going without long term care insurance.)

Some elderly or aging persons would consider purchasing long term care insurance but want to evaluate its cost in today’s dollars.  Such clients would prefer to be shown a single premium long term care insurance policy.  For the many insurance companies that do not offer such a product, the use of an immediate annuity with a lifetime payout (or term certain payout equal to or exceeding the client’s life expectancy) to pay for the premium is one way to approximate such a policy.

Some elderly or aging persons would consider purchasing long term care insurance but feel that their principal is untouchable because it includes appreciated assets that would result in substantial capital gains taxes if sold.  They may view the appreciated asset as merely a stream of income that they receive.  Unlocking the equity in these appreciated assets can often provide the funds necessary to pay the premiums for long term care insurance.  Selling these assets, however, usually results in substantial capital gains taxes, thus reducing the amount remaining to pay for the insurance.  It is this author’s opinion that elder law attorneys and other estate planning professionals should be exploring with these clients the possible uses of a charitable remainder annuity trust (CRAT).

A CRAT is an irrevocable trust established pursuant to Internal Revenue Code section 664 that provides a payout to one or more individuals for their lives or a period of up to 20 years.  The payout must be at least 5%, and is based on the initial fair market value of the trust.  The payout that is selected by the client is payable each year without regard to the actual income of the trust.

The primary reason to consider the use of a CRAT in long-term care planning is that when a CRAT sells appreciated assets that had been donated to it, no capital gains taxes are immediately payable.  The CRAT can then invest the full amount of the proceeds in order to provide the payout, which in turn can be used to pay the long term care insurance premium.

The payout from the CRAT generally represents taxable income to the client. If the payout exceeds the current and accrued income of the trust, capital gain will be received by the client.  The type of taxable income should not be of much concern to the client,  since these taxes do not cause the principal of the CRAT to be diminished.  In fact, any long-term capital gain received from the CRAT could end up being taxed on the client’s income tax returns at a lower percentage than the trust’s income.

At the end of the payout period, any amount left in the CRAT must be paid to a charity selected by the client that is described in Internal Revenue Code section 170(c).  When establishing the CRAT, the client need not make an irrevocable decision about which charity will eventually benefit, as the client can reserve a special power of appointment and thereby preserve the right to change the charity receiving the remainder of the trust at the end of the payout period.

Although the remainder of the CRAT would be inherited by a charity instead of the client’s intended heirs, the existence of the long term care insurance would presumably ensure that the client’s other assets would be left behind as an inheritance to them.

A charitable remainder unitrust (CRUT), the other basic type of charitable remainder trust, is not as good a choice for this type of planning. First, the amount received from a CRUT is determined on an annual basis, and is dependent on the income generated by the CRUT’s investments.  If the investment performance in a CRUT were poor for a substantial period of time, the client would be required to invade the client’s remaining principal to pay the long term care insurance premiums.  Thus, the use of a CRUT is often rejected here because it does not provide the certain payout that a client would be looking for in order to pay the annual long term care insurance premium, which should remain level.

The client establishing the CRAT would be entitled to a charitable deduction on the client’s income tax return based on the present value of the charitable remainder.  It is assumed here, however, that the client would be focused primarily on eliminating capital gains taxes on the sale of appreciated assets and receiving the highest feasible payout in order to pay the long term care insurance premium rather than leaving a large amount to charity and receiving a large income tax deduction.

The difficult choice that a client must make on a CRAT is whether to establish a term certain payout or a lifetime payout.  It is this author’s experience that many elderly or aging persons do not wish to enter into a financial gamble that is based on their meeting or exceeding their life expectancy under an actuarial table.  They are concerned about having lost money if they die earlier than their projected life expectancy, and would prefer a payout for a term certain.  Upon the client’s death prior to the end of the term certain, the remaining payout would go to a beneficiary designated by the client.

Another argument in favor of a term certain payout in a CRAT is that the calculations to meet IRS scrutiny are simpler.  With a lifetime payout and a high payout percentage, the IRS could disqualify the CRAT if statistically there could possibly be no remainder to  be left to charity.  The IRS therefore requires that with a lifetime payout there be no greater than a 5% chance that the CRAT could be exhausted by the payout.  The result of the required calculation often is that for a lifetime payout the payout percentage must be smaller than the payout percentage on a term certain. To pay for the client’s long term care insurance premium with a lifetime payout, then, the CRAT would require a greater initial fair market value via more assets to make up for the lowered percentage payout.  Faced with these figures, the likelihood of needing a payout period of greater than 20 years should be considered.

Statatistically, a 20-year payout may be sufficient for most clients.  Under HCFA  Transmittal No. 64 (November 1994),  a female who is 64 years of age or older or a male who is 58 years of age or older has a life expectancy of less than 20 years.  Thus, for most clients purchasing long term care insurance a CRAT for a term certain of 20 years would be longer than needed.  (If the client wished to cover long term care insurance premiums only for the client’s average life expectancy, persons over these ages would require a shorter term certain for their CRAT, and it would therefore require a lower initial fair market value.)

Since the client’s taxable income will be increased by the CRAT, the client may wish to increase the initial funding and receive a payout in excess of the long term  care insurance premium in order to help pay the increased income taxes. The ability of many clients to deduct the premium as an itemized medical expense on Schedule A of their federal income tax return, however, could in many cases offset the taxable income caused by the CRAT.

Due to their concerns about possible impact of nursing home costs (and the Medicaid disqualification period) on their assets, many aging clients feel under pressure to make transfers of their assets earlier than may otherwise be advisable. One relatively simple way to make such a transfer more palatable to a client is to suggest that the client reserve a power which is known as a non-general power of appointment or a “special power of appointment” (SPA).

What is an SPA?

An SPA is a power which allows someone at a later date to alter the disposition planned under the original instrument of conveyance. This power can be reserved by the client in the original instrument making the transfer.

By virtue of the existence of the SPA, the disposition planned in the original instrument of conveyance amounts to nothing more than a vested or contingent interest subject to divestment. If the SPA is never exercised, however, the property will eventually be inherited by the persons or entities (and in the proportions) originally planned.

The possible alternate recipients of the property named or described in the SPA can be any person or entity. For tax reasons, it seems advisable that the SPA exclude the client, the client’s creditors, the client’s estate, and the creditors of the client’s estate. A power which includes any of this group could be treated as a general power of appointment under Internal Revenue Code sections 2041 and 2514 and saddle the holder of the power with unintended tax consequences. For Medicaid purposes, this group should be excluded, as well as the client’s spouse.

Why does a reserved SPA work?

Two key elements in Medicaid planning are that the property not be reachable by a creditor (such as the state Medicaid program), either (1) during the client’s lifetime or (2) after the client’s death. A transfer which is subject to a reserved SPA can meet both of these tests. As long as the property is vested, albeit defeasibly, in entities or persons other than the client and his spouse, and as long as neither of them have any power to revest the property in themselves, the property should be deemed transferred for purposes of beginning the running of the Medicaid disqualification period. If nursing home care is not needed during the disqualification period, the property is protected in case the need for nursing home care should subsequently arise (unless, of course, Medicaid laws change retroactively, an occurrence which is always a risk in Medicaid planning).

Since the Medicaid disqualification period would begin to run upon the original transfer, any later exercise of the SPA should not cause any additional period of Medicaid disqualification.

Non-tax benefits of reserved SPA to client.

One key benefit of a reserved SPA is that a client who holds such a power maintains a great deal of control over the asset despite the conveyance. An SPA reserved in a deed can amount to a power to change who will eventually inherit the real estate. An SPA reserved in an irrevocable trust can amount to a power not only to change who will eventually inherit the remaining assets of the trust fund, but also to make gifts out of the trust.

A reserved SPA in a deed or irrevocable trust allows an appreciative client the later opportunity to compensate or reward the members of his family who take care of the client and keep the client out of or postpone entry into a nursing home. For example, part or all of the assets of an irrevocable trust with a reserved SPA could be used to build an addition or otherwise revamp the caring child’s home.

If the reserved SPA were banned in the Medicaid planning context, clients would probably resort to making outright gifts, and would have no flexibility to deal with future changes in circumstances. A caring child could then be left in a much worse financial position than another child who takes a share of the client’s assets and later bears no responsibility for the client’s continuing care.

Tax benefits of reserved SPA to client.

The control afforded by the SPA has tax ramifications. For deaths before 2010 and after 2010, at the client’s death, Internal Revenue Code section 2038 will treat the transferred assets as if they had not been transferred, and the full fair market value of the assets as of the client’s date of death will be includible in his federal gross estate. If the assets had appreciated in value during the time of the client’s ownership, this result will often be advantageous to the transferees, as Internal Revenue Code section 1014 then gives each asset a “stepped-up basis.” This means that the value at which each asset is includible in the client’s federal gross estate will then become the asset’s new basis (i.e., the figure above which federal capital gains taxes would later be assessed upon a sale of the asset).

For deaths that occurred during 2010, there are two choices of law, with the default provision being 2011 law, so powers of appointment would receive the treatment described above.  If 2010 law is elected by the executor of the estate, the tax law is unclear, but my opinion is that a reserved power of appointment receives similar tax treatment.  See  my blog post Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?

In a Medicaid trust, a reserved SPA which allows the client and/or the client’s spouse to make lifetime gifts out of the trust fund invokes the grantor trust rules (found in Internal Revenue Code sections 671 through 678). Upon a future sale of the home, the use of the client’s $250,000.00 capital gains exclusion under Internal Revenue Code section 121 may thus be preserved.

Example of use of reserved SPA in deed.

Consider the following use of a reserved SPA in a deed: “John Smith hereby grants to his daughters, Mary Smith, Jeanne Smith, and Cheryl Jones, as joint tenants with right of survivorship, the following premises……John Smith reserves the power, exercisable as often as he may choose, by an instrument recorded at this registry of deeds during his lifetime, to appoint these premises, outright or upon trusts, conditions or limitations, to any one or more of his issue or their then current or surviving spouses.”

If Mary, Jeanne or Cheryl are sued, file for bankruptcy, file for divorce, marry a man for whom John feels little affection, become disabled or incompetent, have a falling out with John, or undergo some other change in circumstances or character, John can eliminate the daughter’s interest, can set it up in trust for the daughter and/or her husband, widower or issue, or can make it subject to a right of first refusal.

The SPA may also be of great utility if a daughter predeceases John. By exercising the SPA he could eliminate her interest and the need for probate of her estate. If in the absence of the exercise of the SPA he were to inherit her share of the home, however, a new Medicaid disqualification period may thus begin to run. If this gift had been made to the daughters as tenants in common, upon a daughter’s death John could be revested with the daughter’s share, and an exercise of the SPA could thus begin the running of a new Medicaid disqualification period.

In the above example of a gift to Mary, Jeanne or Cheryl as joint tenants with a reserved SPA in John, the deed could be recorded and the running of the Medicaid disqualification period could begin without time being spent in reviewing or altering the estate plans of John’s daughters. Upon a daughter’s death where the daughters hold title as joint tenants, and upon John’s later exercise of his SPA, he would not begin the running of a new Medicaid disqualification period because he would not have inherited any interest. (If his testamentary wish were per stirpes, however, the possibility of his later becoming incompetent to exercise the SPA makes this maneuver risky, even if it were meant to be temporary.)

Example of use of reserved SPA in irrevocable trust.

Consider the following use of a reserved SPA in an irrevocable trust: “John Smith reserves the power, exercisable during his lifetime as often as he may choose, to appoint any part or all of the principal and income of the trust fund, outright or upon trusts, conditions, or limitations, to any one or more of his issue or their then current or surviving spouses, or to charitable organizations.”

Much of the above discussion regarding deeds also applies here, except that in a trust the remainder interest would not become vested until John’s death, so that a per stirpes testamentary disposition can be initially established without concern for any daughter’s estate plan, or lack thereof.

If changes in the law adversely affect the trust, it may then be advisable to place all of its assets directly into the hands of the daughters. To get assets out of the trust and into their hands, he could use the gifting aspect of the SPA to make outright gifts to them. The SPA thus can amount to a power to terminate the trust.

Can an SPA be used less aggressively?

Clients and their advisors may feel that a reserved SPA in an irrevocable trust as described above may be too aggressive an approach and may someday be deemed to cause Medicaid disqualification on the grounds of excessive control or indirect access to the trust fund. One less aggressive approach would be to eliminate the aspect of the reserved SPA which would allow the client to make lifetime gifts from the trust to other persons. Since a gifting aspect of the SPA may be required in order to activate the grantor trust rules as to principal, the client could instead reserve an SPA which allows him to make unlimited lifetime gifts to charitable organizations. Under this approach the client could not be deemed to have indirect access to the trust fund. In order to maintain the flexibility to terminate the trust in light of future changes in the law, someone other than the client and his/her spouse could be given an SPA under this less aggressive approach.

A future complication could be caused by use of a simple SPA, for a meticulous conveyancing lawyer may require proof that the SPA was not exercised by will. In such a case the transferor’s will may have to be probated, perhaps solely for this reason. This complication can be eliminated by language in the deed which causes a conclusion presumption of the failure to exercise the power by will or codicil if notice of the establishment of probate proceedings is not recorded in the chain of title within a certain time frame after the transferor’s death.

At the same time at which any such deed is executed, the transferor may also wish to execute a durable power of attorney under which one or more of the transferees could release the transferor’s life estate or SPA. Such a power would allow a transferee whom the transferor does not wish to favor financially, but upon whose judgment the transferor feels secure, to later step into the transferor’s shoes and take corrective action if necessary or desirable under future changes in family circumstances or in federal or state law.

By use of the SPA, each remainderperson would have a vested remainder subject to divestment. If a sibling has such an interest and lives in the home for one (1) year, it is possible that one of the permissible transfers under federal Medicaid law could be utilized. Thus, the transferor may wish to give a partial remainder interest to a sibling who could later be persuaded, if feasible, to live in the home for one year prior to the transferor’s institutionalization in order to preserve it for the transferor’s family. At the same time the deed is executed, or thereafter, the transferor could execute a will which exercises the SPA to remove the sibling’s interest; since such a testamentary exercise of the SPA would not be effective until the transferor’s death, the sibling’s “equity interest” would thus remain part of the record title and intact during the transferor’s lifetime.

It should be noted here that, despite the opinion of one legal commentator, any transfer described herein does not necessarily allow the transferor to make full use of the transferor’s $250,000.00 capital gains exclusion under Internal Revenue Code section 121. If the transferor wishes to move in the future to a smaller, less expensive home, the lawyer should consider placing the home into an irrevocable grantor trust in order to preserve this exclusion.

For many elderly persons in the middle class, a key tax goal is to keep the home includible in the person’s gross estate for federal estate tax purposes. Doing so results in a step-up in the basis of the home under Internal Revenue Code Section 1014, and the persons inheriting the home essentially receive, free of any capital gains tax, the appreciation in value from the time of the initial purchase of the home.

For example, suppose a person who paid $10,000.00 for a home dies when it is worth $200,000.00. The appreciation of $190,000.00 escapes capital gains tax if the home is includible in the person’s gross estate for federal estate tax purposes.

For a person who wishes to give away the home, the most common method of doing so may be to give away the remainder interest while reserving a life estate. Internal Revenue Code Section 2036 states that “the gross estate shall include the value of all property… of which the decedent has at any time made a transfer… under which he has retained for his life… the possession or enjoyment, or the right to the income from, the property.” Thus, if the person deeds the home to others, yet explicitly reserves a life estate, the full fair market value of the home is includible in the client’s gross estate for federal estate tax purposes and the transferees thereby receive the desired step-up in basis.

Unfortunately, some persons deed away their homes without reserving a life estate. Arguably, the federal estate tax inclusion ends up being lost by such a maneuver, but the literal language of Section 2036 quoted above can salvage the step-up in basis: note that the word “retained” is used. The Internal Revenue Service has successfully argued in the past that a right can be retained without having been reserved, and that the continued occupancy of the home after the transfer of title, without paying fair market rent, is evidence of an implicit agreement, understanding or assumption of the parties of the transaction. (See Estate of Linderme v. Commissioner, 52 T.C. 305 (1969).)

For example, if a person deeds the same home described above but reserves a life estate, upon the person’s death the home is includible on the Federal Estate Tax Return and the transferees receive a stepped-up basis of $200,000.00. If the person making the transfer had not reserved the life estate, but continued to live there rent-free or for less than fair market rent, the home should be included on the Federal Estate Tax Return as a “retained life estate” if a step-up in basis is desired.

One final note: under Internal Revenue Code Section 2035, a release of a life estate is ineffective for federal estate tax purposes for three (3) years. This means that a life estate that is released within three (3) years of death is included in the gross estate and results in the desired step-up in basis. Thus, if a person insists on making an outright transfer (perhaps due to Medicaid estate recovery concerns), it may be better to structure the transaction as a deed with a reserved life estate, then have the person release the life estate at a later time.

One choice is the 2010 law under Internal Revenue Code Section 1022, which provides that there be no federal estate tax, but instead imposes modified carryover basis rules. For many assets includible in the estate, there would be no automatic step-up in basis, as there had been under the tax laws in effect before 2010. As has been discussed in several posts on this blog, there are a lot of questions about whether life estates, powers of appointment and irrevocable trusts can obtain a step-up in basis under Section 1022. (For my previous posts on what types of assets may be entitled to a step-up in basis, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2)

The other choice now available to executors of 2010 estates is to be subjected to the new 2011-2012 federal estate tax law, which provides for a federal estate tax for estates that exceed $5,000,000. For many estates under $5,000,000, choosing this law would be advantageous because there would be an automatic step-up in basis for assets includible in the gross estate, just as there had been under the tax laws in effect before 2010.

The default provision in Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 is the 2011-2012 federal estate tax law. Executors of 2010 estates who want the automatic step-up in basis do not have to take any action at all. Executors of estates under $5,000,000 therefore may not have a difficult decision to make, as the default provision in the law could be the preferred choice for all of such estates.  The only complicating factor in favor of electing 2010 law would be Internal Revenue Code Section 121(d)(11), which allows the decedent’s estate, the decedent’s qualified revocable trust or the decedent’s beneficiary (as defined under Section 1022) to utilize the decedent’s $250,000 capital gains exclusion on a sale of the decedent’s principal residence.

Executors of estates that exceed $5,000,000 will have to calculate whether it would be preferable to make a special election to have Section 1022 apply. That election would be made under Section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010:

SEC. 301. REINSTATEMENT OF ESTATE TAX; REPEAL OF CARRYOVER BASIS.
(a) In General- Each provision of law amended by subtitle A or E of title V of the Economic Growth and Tax Relief Reconciliation Act of 2001 is amended to read as such provision would read if such subtitle had never been enacted.
(b) Conforming Amendment- On and after January 1, 2011, paragraph (1) of section 2505(a) of the Internal Revenue Code of 1986 is amended to read as such paragraph would read if section 521(b)(2) of the Economic Growth and Tax Relief Reconciliation Act of 2001 had never been enacted.
(c) Special Election With Respect to Estates of Decedents Dying in 2010- Notwithstanding subsection (a), in the case of an estate of a decedent dying after December 31, 2009, and before January 1, 2011, the executor (within the meaning of section 2203 of the Internal Revenue Code of 1986) may elect to apply such Code as though the amendments made by subsection (a) do not apply with respect to chapter 11 of such Code and with respect to property acquired or passing from such decedent (within the meaning of section 1014(b) of such Code). Such election shall be made at such time and in such manner as the Secretary of the Treasury or the Secretary’s delegate shall provide. Such an election once made shall be revocable only with the consent of the Secretary of the Treasury or the Secretary’s delegate. For purposes of section 2652(a)(1) of such Code, the determination of whether any property is subject to the tax imposed by such chapter 11 shall be made without regard to any election made under this subsection.

If  the above election is made, there would be no federal estate tax, but the modified carryover basis rules would have to be dealt with, and Form 8939 would have to be timely filed. Attached is the 12/16/2010 advance proof copy from the Internal Revenue Service of Form 8939, entitled “Allocation of Increase in Basis for Property Received from a Decedent.”

Schedule A pertains only to surviving spouses. For assets inherited by persons other than surviving spouses, Schedule B would be required. Note that on both of these schedules, the date that the decedent acquired the property is required, along with the decedent’s adjusted basis in the asset. While that information may be easy to determine for real estate, it may not be easy to determine for securities and mutual funds held in book entry for many years. Further, taxpayers and their accountants may find that attempting to list the separate purchases made in dividend reinvestment plans to achieve a step-up in basis on each investment may not be worth the time and effort.

A positive note for taxpayers is that this latest draft of the form still does not require an explanation of why the Executor of the estate believes the asset would be entitled to a step-up in basis under Internal Revenue Code Section 1022. Thus, technical issues as to whether life estates, reserved powers of appointment or irrevocable trusts are “owned by the decedent” and “received from the decedent” under Internal Revenue Code Section 1022 are not flagged on the form except, perhaps, where an “[a]ccurate description of the property” is required. For my previous posts on Internal Revenue Code Section 1022, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2

Traps for the Unwary Regarding the Modified Carryover Basis Rules for 2010 Deaths

Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue
Code Section 1022?

More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010

Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the
Modified Carryover Basis Rules?

Are All Revocable Trusts Eligible for a Step-up in Basis under the Modified
Carryover Basis Rules?

When Are Assets in an Irrevocable Trust Eligible for a Step-up in Basis in 2010
under the Modified Carryover Basis Rules?

Can a “Retained” Life Estate Be Eligible for a Step-up in Basis under Internal
Revenue Code Section 1022?

When Is an Asset Considered “Acquired from the Decedent” under Internal Revenue Code
Section 1022?

What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal
Revenue Code Section 1022?

(1)  The law allows $1,300,000 of basis increase, plus an additional $3,000,000 for a surviving spouse. Increasing the decedent’s basis means somebody has to figure out the decedent’s exact basis in his/her assets. Old deeds and purchase-and-sale agreements may need to be tracked down, and a lot of tedious, time-consuming work will have to be put in on mutual funds and dividend reinvestment plans.

(2)  In addition to the $1,300,000 or $4,300,000 basis increase, additional increases are allowed if the decedent had capital loss carryovers or net operating loss carryovers. That means in some cases the decedent’s final income tax return will need to be prepared first.

(3) Assets with unrecognized capital losses as of the time of the decedent’s death cause the decedent’s estate to have additional basis increases equal to the amount of the unrecognized capital losses. There is no requirement in Section 1022 that this additional basis adjustment be utilized on the asset with the unrecognized capital loss.

(4) Internal Revenue Code Section 121(d)(11) allows the decedent’s estate, the decedent’s qualified revocable trust or the decedent’s beneficiary (as defined under Section 1022) to utilize the decedent’s $250,000 capital gains exclusion on a sale of the decedent’s principal residence. There does not appear to be any time limitation on the usage of this exclusion, so in some many cases it could be wasteful (and legally actionable) to use the Section 1022 basis increase on the decedent’s principal residence without taking Section 121 into account.  This means that the basis adjustment for many estates without surviving spouses under 2010 law can effectively be $1,550,000.

(5) Under Internal Revenue Code Section 6716, there is a $10,000 penalty for failure to file Form 8939 on a timely basis.

(6) Form 8939 is due at the time of the decedent’s final income tax return, so in many cases placing Form 1040 on extension may be advisable to give the Executor more time to gather all the necessary information for Form 8939.

(7) Beneficiaries are required to be sent information about the basis increase within 30 days after Form 8939 is filed. Failure to do so can result in a $50 penalty per beneficiary.

(8) Only an “executor” can allocate the basis increase, and that term is not defined within Section 1022, but under Treasury Regulation 20.2203-1, the term “executor” includes an executor or administrator, but if there is no executor or administrator, the term means “any person in actual or constructive possession of any property of the decedent, ” and the term can actually include “the decedent’s  agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and debtors of the decedent  in this country.”  Thus, the lack of an executor or administrator being appointed for a decedent’s estate can mean the possibility exists for different persons or entities to file competing Forms 8939 with different basis adjustments (and perhaps the first one filed wins).

(9) It is possible that the Executor’s basis allocation decisions on a timely-filed Form 8939 may be final, binding and unamendable even  if self-serving, biased or irrational.

(10) Where the date that the decedent acquired the property is required, Executors and their accountants may find that attempting to list the separate purchases made in dividend reinvestment plans to achieve a step-up in basis on each investment may not be worth the time and effort.

(11) The first version of Form 8939 withdrawn by the IRS did not require an explanation of why the Executor of the estate believes the asset would be entitled to a step-up in basis under Internal Revenue Code Section 1022. Thus, technical issues as to whether life estates, reserved powers of appointment or irrevocable trusts are “owned by the decedent” and “received from the decedent” under Internal Revenue Code Section 1022 may not be flagged except, perhaps, where an “[a]ccurate description of the property” is required. Even though the basis of an asset is a question of fact that the IRS can later bring up, a decision will have to be made as to how much information to include on Form 8939.

(12) Filing Form 8939 may make sense even for smaller estates, to help the beneficiary prove to the IRS (when selling the asset received from the decedent) that the estate did not exceed $1,300,000.

(13) It is possible, but not certain, that filing Form 8939 will begin the 3-year clock against the IRS on valuation issues.

(14) Internal Revenue Code Section 1022 has specific safe harbor provision for qualified revocable trusts but not for revocable trusts. (A qualified revocable trust is simply a revocable trust that is elected to be treated as part of the decedent’s estate for income tax purposes under Section 645(b)(1).) To be conservative and assure the possibility of a step-up in basis for assets held in a revocable trust for someone who dies during 2010, it seems that the Executor of the decedent’s probate estate and the Trustee of the decedent’s revocable trust should make the election under Section 645(b)(1) to treat the trust as a qualified revocable trust for income tax purposes.

Hopefully, The Internal Revenue Service will complete its work soon, since the form will be due with the decedent’s final federal income tax return on April 15, 2011.  Once a new version of Form 8939 is made available, I’ll post it here.

12/16/2010 UPDATE: SEE Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths

Schedule A pertains only to surviving spouses. For assets inherited by persons other than surviving spouses, Schedule B would be required. Note that on both of these schedules, the date that the decedent acquired the property is required. While that information may be easy to determine for real estate, it may not be easy to determine for securities and mutual funds held in book entry for many years. Further, taxpayers and their accountants may find that attempting to list the separate purchases made in dividend reinvestment plans to achieve a step-up in basis on each investment may not be worth the time and effort.

A positive note for taxpayers is that this draft of the form does not require an explanation  of why the Executor of the estate believes the asset would be entitled to a step-up in basis under Internal Revenue Code Section 1022. Thus, technical issues as to whether life estates, reserved powers of appointment or irrevocable trusts are “owned by the decedent” and “received from the decedent” under Internal Revenue Code Section 1022 are not flagged on the form except, perhaps, where an “[a]ccurate description of the property” is required. For my previous posts on what types of assets may be entitled to a step-up in basis, see http://elderlawblog.info/category/internal-revenue-code-section-1022-2

12/16/2010 EDIT:  Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths

Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022?

More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010

Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the
Modified Carryover Basis Rules?

Are All Revocable Trusts Eligible for a Step-up in Basis under the Modified
Carryover Basis Rules?

When Are Assets in an Irrevocable Trust Eligible for a Step-up in Basis in 2010
under the Modified Carryover Basis Rules?

Can a “Retained” Life Estate Be Eligible for a Step-up in Basis under Internal
Revenue Code Section 1022?

When Is an Asset Considered “Acquired from the Decedent” under Internal Revenue Code
Section 1022?

What Are the Mechanics of Obtaining a Step-up in Basis in 2010 under Internal
Revenue Code Section 1022?

A postnuptial agreement is essentially a prenuptial agreement that is entered into after the marriage has taken place. Either of these agreements can completely ignore divorce and child support issues and be limited solely to estate planning issues. Where many married couples (especially those with children from prior marriages) are concerned about what might be done with their inheritance by the surviving spouse, this case makes it clear that under Massachusetts law they can enter into a limited postnuptial agreement, which I refer to as an Estate Planning Agreement, to prevent the surviving spouse from later disinheriting the family of the first spouse to die.

There are other ways to protect the children from the previous marriage, but those other ways have limitations. For example, under Massachusetts law, a will contract can be entered into by a married couple to prevent the surviving spouse from changing his/her will; unfortunately, a will contract would only cover assets passing through probate, yet many assets pass free of probate. Further, some spouses establish a so-called QTIP trust to provide income for life to the surviving spouse, with the eventual inheritance going to the previous family; unfortunately, the surviving spouse would have the right to make a statutory election against the decedent’s will and trust and could end up with a lot more assets than was planned.

A limited postnuptial agreement that covers estate planning issues is a document that more and more married couples may be entering into in future years, due to the great increase in blended families.

A lot of discussion has occurred among Massachusetts elder law attorneys about this case. While the decision appears to be justified based on the details of the trust, what is troubling is that the language in the decision was not as concise as one would expect from an appellate court. It is difficult to read the case and see exactly why the court made its decision, but perhaps the court simply didn’t see sufficient reason to overturn the decisions made below in the Superior Court and at the MassHealth fair hearing level.

The trust in Doherty had some fatal flaws. The person who established it had the authority to make decisions as to what constituted principal and income, and had the right to terminate the trust and make distributions to the “beneficiaries” (which was an undefined term). It appeared that the person who established the trust could be given the assets from the trust, and Medicaid would then be correct in treating the assets of the trust as countable assets, but because the court was not specific about what was wrong with this trust under Medicaid law, any trust under which too much control is reserved could eventually be under attack under Doherty’s poorly-written decision.

Fortunately, in the months since the Doherty decision was handed down, it does not appear that the case is being stretched by MassHealth lawyers to apply to other irrevocable trusts. Still, to be conservative, I have been suggesting to my clients who have established irrevocable trusts that a thorough review is necessary, and, in some cases, we have been releasing some of the powers and rights that were reserved when the trust was originally established. It may also be a good idea for the older person who established the trust to step down as trustee.

New MassHealth developments are reported by elder law attorneys through listservs to each other on a daily basis. We learn about new positions taken by MassHealth lawyers before those problems ever are in reported court cases, and change our strategies. Because of Doherty, irrevocable trusts should often be reevaluated. My suggestion to all persons who have established irrevocable trusts for Medicaid or long-term care planning purposes is that you have your irrevocable trust reviewed every 2 years.

Under pre-2010 law, an asset that was includible in the decedent’s gross estate for federal estate tax purposes always received a step-up in basis.  A retained life estate, includible under Internal Revenue Code Section 2036, was one of those assets, and a line of tax cases developed that defined the word “retained” as including not only a life estate that was explicitly reserved, but also life estates that were retained by agreement, understanding, assumption or conduct of the parties. That meant that under Internal Revenue Code Section 2036, the real estate of someone who had completely given it away could be pulled back into the decedent’s gross estate.  For pre-2010 deaths, Section 1014 allowed a step-up in basis for assets pulled back into the gross estate under section 2036, but, unfortunately, neither of those laws are in effect for decedents who die during 2010.

For 2010 deaths, Section 1022 requires that assets be owned by the decedent at the time of death and received from the decedent at that time, and those are much stricter standards than were required under Sections 2036 and 1014 in previous years.  Tax positions formerly available utilizing Section 2036 are irrelevant in 2010, as there is no language in Internal Revenue Code Section 1022 that would allow an argument that the conduct of the parties after the gift would be equivalent to the retention of ownership.  The retained life estate argument is an extreme stretch on the “owned by the decedent” test, but even if that argument were to pass muster, the argument in favor of the step-up would still fail on the “received from the decedent” requirement of the statute.  If full legal title to the real estate was already given away, at the time of death the donees of the lifetime gift cannot possibly receive from the decedent what they have already completely owned.

Claiming that assets that were given away during lifetime were nevertheless owned by the decedent and received from the decedent at the time of death, and receive a step-up in basis under Internal Reveue Code Section 1022, seems to me to be a frivolous tax argument.  We’ll know better how much leeway tax professionals will have to take such a position when we finally see the new tax return that is in the process of being created by the Internal Revenue Service for allocation of increased basis for 2010 deaths.

Before the counseling meeting, the elder must be sent an information packet that includes detailed loan information with comparisons, a document entitled Preparing for Your Counseling Session, and a 28-page booklet entitled Use Your Home to Stay at Home – A Guide for Older Homeowners Who Need Help Now.

During the processing counselors must now gather information from the prospective reverse mortgage borrower to examine the elder’s ability to maintain the reverse mortgage, including taxes and insurance premiums. The point there is to attempt to prevent foreseeable foreclosures due to cash flow problems. 

As part of the process, counselors must ask 10 questions to ensure that the elder understands the reverse mortgage’s key elements. If the elder fails to give the correct answer at least 5 of the questions, or appears to be coerced or a possible victim of fraud, the counselor may withhold the counseling certificate. Thereafter, if the elder is insistent on proceeding, HUD states that “the counselor will issue a certificate and will flag the certificate in FHA Connection so the lender is aware that the client’s level of understanding of reverse mortgages is minimal.” Once that occurs, presumably it will be up to the lender and the lender’s counsel to decide whether to give the loan to the elder, especially where mental incapacity would then appear to be a possible problem.

It appears from the tax law that a tax return (which as of now doesn’t even have a number assigned to it) would be due at the same time as the decedent’s final income tax return (April 15, 2010, unless extended) and would only be required if the estate exceeded $1,300,000 in value or if the decedent received property via gift in the 3 years before death.  The recipients of property to which the step-up in basis is allocated would receive written proof of the step-up within 30 days after the return is filed (which may be too late for some early filers, and cause the need for amended returns.)  

It appears that an automatic basis increase would occur for smaller estates, but the question remains whether estates of less than $1,300,000 should also file the return.  My opinion is that the return should be filed, for how else would the IRS, many years down the road, be able to determine whether a legitimate step-up in basis is being claimed?  If the burden is someday placed back on the taxpayer to prove that the estate was less than $1,300,000, how would the taxpayer be able to prove that point?  In addition, it may make sense to file the return for smaller estates if attempting to achieve a step-up in basis on questionable items under Internal Revenue Code Section 1022, such as reserved life estates (see http://wp.me/pRFoy-8k), reserved powers of appointment (see http://wp.me/pRFoy-90) and irrevocable grantor trusts (see http://wp.me/pRFoy-fW).

Rumors abound that a political compromise may allow taxpayers have the option of using 2009 tax law for 2010 estates. If such a law change doesn’t occur soon, the executors, personal representatives and trustees of larger estates should soon begin the process of determining the adjusted basis in the 2010 decedent’s assets.  Busy accountants often have an available window of time from October 16 on through the end of the year, and larger estates should use that availability to begin dealing with this 2010 tax mess dumped on us all by the 2001 Republican Congress.

Even though Robert had no assets and even though Judith had not signed any contract or agreement accepting financial responsibility for his nursing home bills, she was successfully sued because she did not file for and obtain MassHealth (i.e. Medicaid) benefits for him on a timely basis.  On a motion for summary judgment, the Court found that under Massachusetts General Laws, Chapter 209, Section 1, she was liable as his wife for the full cost of necessaries furnished to Robert during his life.

This case highlights why anybody concerned about the costs of nursing home care should be sure to obtain legal advice about MassHealth.  If Judith had obtained legal advice from a Certified Elder Law Attorney promptly after Robert entered a nursing home, she would have learned how to apply for MassHealth for him on a timely basis.  MassHealth coverage could have been applied for as long as three months after his health insurance had stopped paying for his care.

For some basic information about the at-home spouse’s ability to retain assets under MassHealth (i.e., Medicaid) law, see http://elderlawblog.info/2010/04/05/preserving-all-assets-and-maximum-income-for-the-community-spouse-when-the-other-spouse-enters-a-nursing-home/

On July 1, 2009, the Uniform Probate Code became effective in Massachusetts, and it specifically states that a Durable Power of Attorney does not become ineffective due to a lapse of time.  That means that Durable Powers of Attorney executed on or after July 1, 2009 can remain in effect for as long as you want, including your entire life.

The legislation implementing the Uniform Probate Code in Massachusetts involved changing many different laws, and some were replaced or amended, and others were repealed. The Uniform Probate Code does not specifically protect Durable Powers of Attorney under the law in effect before July 1, 2009.  After a careful review of the law, it is my belief that all Durable Powers of Attorney executed under previous Massachusetts law may be invalid.  Where the previous Massachusetts durable power of attorney laws were repealed, not replaced, and where the state legislature had made choices in that legislation as to whether laws should be replaced or repealed, the effect is that the previous Massachusetts law,  Chapter 201B, was eliminated as of July 1, 2009 as if the law had never existed.  That means Durable Powers of Attorney which make reference to Massachusetts General Laws, Chapter 201B became invalid on July 1, 2009, and any persons who have such documents should arrange to re-execute new Durable Powers of Attorney effective under the Massachusetts Uniform Probate Code.

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-revere.pdf

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-springfield.pdf

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-taunton.pdf

http://www.mass.gov/Eeohhs2/docs/masshealth/appforms/fir_1-tewksbury.pdf

Note that it appears to be a requirement of these letters that a MassHealth application be already filed.  In that situation, time is usually very limited to comply with MassHealth’s written requests for verifications of banking transactions.  Since you wouldn’t know whether the bank had complied with the request unless you received the bank records yourself, it is probably not a good move to request that the records be sent directly to the MassHealth Enrollment Center.

If the special needs trust had originally been made irrevocable (not revocable) with explicit provisions to supplement but not supplant governmental benefits, the trust would likely have been of greater long-term benefit to the disabled child.  To allow the child to be eligible for SSI, the trust would also have required restrictions on payments directly to the child and restrictions involving expenses for the child’s food and shelter.

1022(e) Property acquired from the decedent

    For purposes of this section, the following property shall be

considered to have been acquired from the decedent:

        (1) Property acquired by bequest, devise, or inheritance, or by

    the decedent’s estate from the decedent.

        (2) Property transferred by the decedent during his lifetime–

            (A) to a qualified revocable trust (as defined in section

        645(b)(1)), or

            (B) to any other trust with respect to which the decedent

        reserved the right to make any change in the enjoyment thereof

        through the exercise of a power to alter, amend, or terminate

        the trust.

        (3) Any other property passing from the decedent by reason of

    death to the extent that such property passed without consideration.

At first blush, it may appear that Congress meant for (e)(1) to deal with all estate issues, for (e)(2) to deal with all trust issues, and for (e)(3) to deal with anything else, but why in (e)(1) did Congress specifically reference bequests, devises and inheritances when it would have sufficed to mention the decedent’s estate?  The extra phrases must have been placed in the law for a reason, and the comma after the word inheritance is significant, in that it seems to separate (e)(1) into two sections: “bequest, devise, or inheritance” and “the decedent’s estate.”  Further, the definition of “inheritance” found at law.com is “whatever one receives upon the death of a relative due to the laws of descent and distribution, when there is no will. However, inheritance has come to mean anything received from the estate of a person who has died, whether by the laws of descent or as a beneficiary of a will or trust.”  Black’s Law Dictionary, Fifth Edition goes even further on the definition of inheritance and includes assets which pass “by operation of law.”  Based on this way of reading (e)(1), I conclude that Congress probably intended that the phrase “acquired from the decedent” include inheritances from trusts.

On the other hand, (e)(2) seems to suggest limited step-up opportunities for assets in trusts.  Under (e)(2)(B), the step-up would be limited to trusts established by the decedent with a reserved power to alter, amend or terminate, so many irrevocable trusts would not be eligible for a step-up in basis, but perhaps Congress, already having dealt with bequests, devises and inheritances in (e)(1), wanted to make sure that certain other grantor trusts not be eligible for a step-up in basis, and was expressing its intention to exclude powers that had been given to the decedent to attempt to obtain a step-up in basis. 

If (e)(1) and (e)(2) were meant to cover estate and trust issues, then (e)(3) was meant to cover any other types of transfers, such as jointly-held assets and transfer-on-death, pay-on-death and beneficiary designations.  It also seems that a so-called Ladybird deed, where the owner of real estate deeds it away but reserves the right to retrieve it, fits into the (e)(3) category, although it may be questioned whether the non-exercise of a reserved power could be considered passing “from” the decedent. 

Two other common types of transfers, a reserved power of appointment and a reserved life estate, are more problematic, but may also fit under (e)(3).  A reserved power of appointment in a deed is not a possessory interest but can also fit into the (e)(3) category because the real estate was a vested interest subject to divestment, and the real estate passes without consideration when the original owner dies and the divestment possibility is eliminated; until the power holder’s death, the person or entity to whom the real estate was deeded cannot sell or mortgage it, and is therefore not the owner in any significant economic sense. 

A reserved life estate may fit under (e)(3) because the person or trust to which the real estate was deeded does not have possession during the life tenant’s lifetime, and, at the time of the life tenant’s death, the life tenant has an ownership interest to the exclusion of the holder of the remainder.  Under this type of analysis, even though title passed when the deed was recorded and the remainder interest became vested at that time, the real estate could still be viewed as passing “from” the decedent.

As I suggested in Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?, it appears that the assets in an irrevocable trust that contains a reserved special power of appointment can be eligible for a step-up in basis.  A deeper reading of Section 1022, however, reveals other step-up opportunities as long as the assets are deemed owned by the decedent under Section 1022(d) and received from the decedent under Section 1022(e).

The grantor trust rules in Internal Revenue Code Sections 671-679 have long determined whether someone should be treated as the owner of an irrevocable trust for income tax and capital gains tax purposes.  In particular, Internal Revenue Code Sections 673-678 all begin with the general rule that the “grantor shall be treated as the owner of any portion of a trust” described in that section.  Since none of those sections are specifically negated in Section 1022, it appears that ownership under the grantor trust rules should suffice as the decedent’s ownership under Section 1022.  While there are special rules about ownership under Section 1022(d), those rules do not appear to be an exhaustive list.  Further, when Congress intended to negate certain planning maneuvers being treated as ownership in Section 1022, such as powers of appointment given to a decedent, it specifically did so. 

Thus, it appears that grantor trusts meet the “owned by the decedent at the time of death” standard in Section 1022(d)(1).  It is not much of a stretch to state that assets that were deemed “owned” by the decedent during lifetime were then at the time of death ”received” from the decedent.  Assets in a grantor trust established and funded by the decedent would then fit into the category in Section 1022(e)(3) of “other property passing from the decedent by reason of death to the extent that such property passed without consideration.”

If you have already sold your stock from a demutualized life insurance company and your income tax returns showed the entire sale proceeds as taxable income, you should file amended returns and claim refunds as soon as possible.

Under Massachusetts General Laws, Chapter 201F, parents can give written authorization to allow their minor child’s caregiver to make educational and/or health care decisions.  The caregiver must certify that the child is living with the caregiver.  The authority given in the affidavit to the caregiver does not eliminate the parent’s legal right to make all final decisions, and the parent can override the decisions of the caregiver. 

Executing a Caregiver Authorization Affidavit appears to be an easy and effective way for a parent to give temporary decision-making authority to the person with whom their minor child will be staying during the parent’s absence.

Lookback and Disqualification Periods

Many persons, including some who are rendering advice about Medicaid law, seem to misunderstand the Medicaid lookback period. The lookback period is not the same as the disqualification period. When a Medicaid application is filed, the state Medicaid agency looks back five (5) years for gifts made and trusts established on or after February 8, 2006. Based on whatever the state Medicaid agency finds in the lookback period, a disqualification period can be imposed.

A thorough understanding of the interaction between the lookback and disqualification periods is needed before deciding whether a gift can be made, or whether the filing of a Medicaid application should be delayed.

Last-Minute MassHealth (i.e., Medicaid) Planning for Married Couples

The community spouse (A) can keep all assets automatically in some cases; (B) can spenddown excess assets in some cases; and (C) can keep all assets in many other cases through a fair hearing process. All protected assets must be transferred into the community spouse’s name, and the 5-year lookback period does not apply to this allowable transfer of assets.

When all else is determined by an elder law attorney as potentially unsuccessful, the community spouse can purchase an immediate annuity, which is essentially like buying a short-term pension.  There is no current regulation requiring that the annuity extend for the community spouse’s life expectancy or that the institutionalized spouse be the post-death beneficiary.

To allow extra items to be bought for the institutionalized spouse without causing the loss of MassHealth benefits that an outright inheritance would cause, after the gifts are made to the community spouse, the community spouse should often execute a will containing a testamentary trust for the institutionalized spouse’s benefir.

Last-Minute MassHealth (i.e., Medicaid) Planning for an Unmarried Person

Long-term care insurance protects the home from a MassHealth estate recovery claim for long-term care (but not community care) benefits if questions on the application are answered correctly.

Partial gifts of real estate and other assets can still be advisable, even after a nursing home stay has begun, if sufficient assets are retained to pay for the disqualification period caused by the gifts, or the remainder of the lookback period.

For a person whose realistic life expectancy is far less than average, an immediate annuity may, even under the 2006 law, be a way to minimize nursing home payments and preserve funds for the eventual post-death beneficiary of the annuity.

Can I file more than one type of homestead?

Through a process known as stacking, it is possible to file more than one type of homestead.  Under current law, each one would protect $500,000 of the value of the primary residence.

What happens to my Declaration of Homestead after I die?

What happens to your homestead when you die can vary based on the homestead type. The Elderly and Disabled types do not allow any protection to anyone after your death, so a creditor can sue your estate without concern for an Elderly or Disabled Declaration of Homestead. The regular type, however, continues after your death to protect your spouse and minor children. If you have minor children, the problem with the regular Declaration of Homestead (unless special language is added) is that their right to live there can complicate a sale or refinance.

My husband is in a nursing home, so should he file a Declaration of Homestead? As described in the previous answer, a regular Declaration of Homestead would protect your right to continue to live in the home after his death.  The better move in many situations, however, may be for him to deed the home to your name, since transfers between spouses are allowed under Medicaid and MassHealth laws and regulations.  If he keeps the home in his name but you die first, he’ll end up being the sole owner of the home, and after he dies MassHealth would have an estate recovery claim against his estate for repayment.

What’s better, a Declaration of Homestead or an umbrella policy?

I’d say an umbrella policy is more important to a typical person than a Declaration of Homestead.  For a Declaration of Homestead to have any value for you, you’ve been sued and you’ve essentially lost everything else and have ended up in bankruptcy.  An umbrella policy has the potential to protect all of your assets against major claims and to keep you away from bankruptcy.

Can a person whose home is in a trust file a Declaration of Homestead?

Ambiguities in Massachusetts law are supposed to be decided by Massachusetts courts, but no case regarding the homestead law has yet been decided by the top court, the Supreme Judicial Court of Massachusetts.  Lower Massachusetts courts have held that a home in a trust is not protected by a Declaration of Homestead.  A 2010 case in federal Bankruptcy Court, however, has interpreted Massachusetts homestead law as allowing a person whose home is in trust to file a Declaration of Homestead, so at this point it appears that a person whose home is in a trust can protect the home by filing a Declaration of Homestead.

If certain basic household expenses are more than 30% of the MMMNA, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,739 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,739 of the married couple’s total income.  All of these figures remain unchanged through June 30, 2011.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Preserving Assets and Maximum Income for the Healthier Spouse When the Other Spouse Enters a Nursing Home.

For undue influence to exist, a previous court had concluded in Heinrich v. Silvernail:  “Four considerations are usually present in a case in which a supportable finding of undue influence has been made. These involve showings that an (1) unnatural disposition has been made (2) by a person susceptible to undue influence to the advantage of someone  (3) with an opportunity to exercise undue influence and (4) who in fact has used that opportunity to procure the contested disposition through improper means.” 

In Germain v. Girard, the person guilty of undue influence had received only an indirect benefit, as it was his wife who eventually received a larger inheritance. Since she had benefitted from his actions, and he would indirectly receive a financial benefit by being married to her, the court invalidated the trust amendment that the husband had directed a lawyer to prepare for his father-in-law shortly before death.  That lawyer had represented the husband in prior cases and did not even meet his new “client” until he brought the trust amendment to the hospital to be signed.

Because of Germain and other recent Massachusetts case law developments, the burden of proof when arguing the existence of undue influence is no longer on the person challenging gifts, joint accounts and estate plan changes.  If a person who was in a fiduciary role or other position of responsibility received a direct or indirect benefit from a transaction, that person will now be in the position of defending the transaction.  If a person who relies on you for help in their everyday life is making any type of change that could possibly benefit you financially, that financial transaction or legal document can later be reversed or undone by the court if somebody else objects to it.

A large part of the court’s concern in Germain was that the lawyer drafting the new trust provisions was taking instructions from someone other than the person who was eventually going to sign the document.  Therefore, lawyers who prepare documents are now being held to higher standards to make sure elderly and disabled persons are being protected.  When an elderly or disabled person makes a gift, creates a joint account or makes changes to an estate plan (including wills, trusts, beneficiary designations and other probate-avoidance techniques), it is important that the elderly or disabled person receive independent legal advice, or else the transaction could later be declared null and void after an expensive legal battle.

The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c).  IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.  Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”

Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not, and that there’s nothing in between? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s $1,000,000 lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.

For another opinion on this topic, see Section 2511(c) and Charitable Gift Planning.

If, however, instead of selling the assets the person were to donate them to a charitable remainder trust, the assets can then be sold by the trust.  Because it is the charitable trust, and not the former individual owner, who is selling the property, no immediate capital gains tax is payable.  The trust can reinvest all of the proceeds, with no reduction in principal for the payment of capital gains tax.

For example, an elderly person with highly appreciated but non-income-producing land might consider donating that land to a charitable remainder trust.  The trust would then sell the land, invest all of the proceeds in incoming-producing investments, and pay to the elderly person whatever income stream he or she has selected.

A charitable remainder trust is an irrevocable trust established pursuant to Internal Revenue Code Section 664.  The donor or other person can receive an income interest for life or for a period of up to 20 years.  A charity described in IRC section 170(c) must receive whatever is left in the trust at the end of the period.  It is not necessary for the donor to make an irrevocable decision as to the identity of the ultimate charitable beneficiaries at the time the trust is established.  He or she can reserve a power to redesignate the charity or charities that will receive the remainder interest.

Many older persons may have charitable intentions and desire a higher level of income, but would reject a charitable remainder trust on the grounds that, since the trust remainder is distributed to charity at their death, they would be disinheriting their families.  If the older person is insurable, there is a possible solution to this problem.  With part of the increased income, the older person can purchase a life insurance policy and pay the premiums from the increased income.  Alternatively, the client can establish an irrevocable life insurance trust and use part of the income from the charitable trust to make gifts to the insurance trust, which then would use the funds to purchase and maintain the policy.  Upon the older person’s death, the assets in the charitable remainder trust are distributed to charity, and the life insurance proceeds provide an inheritance for the donor’s family.

The donor of a charitable remainder trust is entitled to an income, gift, or estate tax charitable deduction based on the present value of the charitable remainder interest.  See Regs. 1.664-2(c), 1.664-(b)(5) and 20.2031-7.  Thus, in addition to avoiding capital gains taxes, the donor receives the additional advantage of a charitable deduction on his or her income tax return.  Further, since estate or inheritance taxes (which would reduce the ultimate amount inherited) may be eliminated by this planning, the face amount of a life insurance policy that is meant to “replace” the lost inheritance need not be for the full amount of the assets transferred to the trust.

Under very specific IRS rules, a charitable remainder trust must be established in the form of either an annuity trust or a unitrust.

Charitable Remainder Annuity Trust (CRAT)

An annuity trust is a charitable remainder trust that pays the income beneficiary a specified sum, which must be not less than five percent of the initial net fair-market value of all property placed in the trust.  See Section 664(d).  Under this type of trust, the beneficiary receives a specified amount each year, without regard to the actual income of the trust.  After the annuity trust is established, no additional contributions may be made to it.  Because the amount of annual income payable to the noncharitable beneficiary of an annuity trust is fixed, inflation inures to the benefit of the remainder beneficiary (i.e., the charity).

One important requirement for an annuity trust is that there must be at least a five percent (5%) likelihood that there will in fact be a charitable remainder – that is, that the annuity income beneficiary will not use up the entire trust corpus.  This raises a concern in establishing the trust, since the Code and Regulations specify five percent as the noncharitable beneficiary’s minimum interest but do not specify any maximum percentage.  Actuarial tables used by the Internal Revenue Service must therefore be reviewed while drafting an annuity trust in order to ensure that the percentage being used is low enough, when viewed against the expected rate of return or investments, so that a charitable remainder will theoretically exist.

Charitable Remainder Unitrust (CRUT)

A unitrust is a charitable remainder trust in which a fixed percentage of not less than five percent (5%) of the fair market of the trust assets valued annually is distributed to the noncharitable beneficiary.  See Section 664(d)(2).  A type of unitrust known as a NIMCRUT may provide that the trustee is to pay the income beneficiary only the amount of trust income, even if that is less than the amount required to be distributed.  If the trustee paid less than that amount in earlier years, because, for example, real property had not yet been sold, the trustee can “make up” the difference by later paying a larger amount to the income beneficiary.

Unlike the annuity trust, additional contributions may be made to a unitrust either during the lifetime of the income beneficiary or by a testamentary addition by the donor.  If the trust permits these additional contributions the trust document must provide that, for the taxable year of the trust in which an addition is made, the unitrust amount must be computed by a formula set out in Reg. 1.664-3(b).  Because the annuity amount is not fixed, a unitrust protects the income beneficiary against the ravages of inflation.

Internal Revenue Code Section 2511(c)

Unfortunately, the 2010 estate and gift tax law is a mess, and Internal Revenue Code Section 2511(c), effective for gifts made during 2010, may significantly affect charitable remainder trusts.

The Internal Revenue Service has already attempted to provide guidance about Internal Revenue Code Section 2511(c).  IRS Notice 2010-19 states that “[C]ertain transfers in trust are treated as transfers of property by gift even though such transfers would have been regarded as incomplete gifts, or would have been treated as transfers under the gift tax provisions in effect prior to 2010. … Section 2511(c) broadens the types of transfers subject to the transfer tax under Chapter 12 to include certain transfers to trusts that, before 2010, would have been considered incomplete and, thus, not subject to the gift tax.  Accordingly, each transfer made in 2010 to a trust that is not treated as wholly owned by the donor or the donor’s spouse … is considered to be a transfer by gift of the entire interest in the property under section 2511(c).”

Doesn’t this language mean that a transfer to a trust is either a completed gift or it is not? If so, perhaps nobody should establish and fund a charitable remainder trust during 2010. First, one way of reading the current IRS interpretation of Internal Revenue Code Section 2511(c) is that the entire amount contributed to a charitable remainder trust is a completed gift, even the amount retained as the income interest. Under that interpretation, only part of the gift would be deemed to charity, and the remainder would utilize the grantor’s lifetime gift tax exemption. Second, a trust that provides for a successive income interest would also be treated as a completed gift, because the retention of a power of appointment over that interest (as is usually done) would not cause it to be an incomplete gift during 2010.

The need for continued therapy is especially important for those persons whose quality of life would decline without it, especially those with degenerative diseases.  See How the “Improvement Standard” Improperly Denies Coverage to Medicare Patients with Chronic Conditions. 

Fortunately, the Center for Medicare Advocacy, Inc., of Willimantic, Connecticut, has initiated a national campaign to change this mentality that is so engrained in the health care system.  http://www.medicareadvocacy.org/Projects/Improvement/ImprovementMain.htm

To obtain a step-up in basis for appreciated assets, it appears that a Federal Estate Tax Return must be filed for any decedent who dies during 2010.  Internal Revenue Code Section 1022(d)(3) states that basis increases must be allocated “on the return required by Section 6018.”  Internal Revenue Code Section 6018 pertains to the filing of Federal Estate Tax Returns, but, unfortunately, no such return is actually required for anybody who dies during 2010.

A Federal Estate Tax Return is due 9 months after a decedent’s        death, and can normally be placed on extension for no more than 6 months, but a temporary amendment to Internal Revenue Code Section 6075 provides that the Federal Estate Tax Return will normally be due (unless Internal Revenue regulations provide otherwise) when the decedent’s        final federal income tax return is due.  The requirement in Internal Revenue Code Section 1022 that basis increases be allocated on a Federal Estate Tax Return poses a potentially huge tax trap for the unwary, as Section 1022 does not state whether a basis increase can be allocated on a late-filed return.  Unfortunately, many persons may not even become aware of this basis issue until they have sold appreciated assets that they inherited and are preparing to file their income tax returns, and, if assets had been inherited in any year before the sale, the deadline for the executor of the decedent’s estate to allocate the basis increase may well have passed by then.

Reportedly, the Internal Revenue Service is working on a new version of the Federal Estate Tax Return.  Estate planning professionals should soon begin the process of informing the executors of the estates of all 2010 decedents about the need to file this return, and accountants should revise their annual questionnaires to ask about assets that were inherited during 2010.

Only an “executor” can allocate the basis increase, and that term is not defined within Section 1022, but under Treasury Regulation 20.2203-1, the term “executor” includes an executor or administrator, but if there is no executor or administrator, the term means “any person in actual or constructive possession of any property of the decedent, ” and the term can actually include “the decedent’s        agents and representatives; safe-deposit companies, warehouse companies, and other custodians of property in this country; brokers holding, as collateral, securities belonging to the decedent; and debtors of the decedent        in this country.”  Thus, the lack of an executor or administrator being appointed for a decedent’s estate can mean the possibility exists for different persons or entities to file competing Federal Estate Tax Returns with different basis adjustments.

EDIT:  See 9/14/2010 update: http://elderlawblog.info/2010/09/14/more-about-the-mechanics-of-obtaining-a-step-up-in-basis-in-2010-under-internal-revenue-code-section-1022

EDIT:

Internal Revenue Service Releases 12/16/2010 Advance Proof Copy of Form 8939 Required for Step-up in Basis for 2010 Deaths

Having already looked at Section 1022 and dealt with life estates ( Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022?  and  More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010) and powers of appointment (Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules?), I figured revocable trusts would be an easy topic, but it isn’t, and the more I look at this statute the more illogical it appears. 

To qualify for the step-up in basis under 2010 tax law, an asset must be considered to be owned by the decedent under Section 1022(d) and considered to be acquired from the decedent under Section 1022(e).  Anything owned by a revocable trust established by the decedent would seem to be acquired from the decedent as a result of the decedent’s death, but are those assets considered “owned” by the decedent?  For some reason, Congress took pains to include “qualified revocable trusts” in Section 1022(d)(1)(B)(i) in the list of assets deemed owned by the decedent, and also in Section 1022(e)(2)(A) in the list of assets passing from the decedent.  (A qualified revocable trust is simply a revocable trust that is elected to be treated as part of the decedent’s estate for income tax purposes under Section 645(b)(1).)  It seems that assets in all revocable trusts would qualify as an “inheritance” under Section 1022(e)(1), and also under Section 1022(e)(2)(B) where the decedent had reserved rights to “alter or amend,” so why would Congress have specifically mentioned qualified revocable trusts?  Would that be because only an executor can allocate the basis increase?  Is it possible that the specific inclusion of qualified revocable trusts in Section 1022(e)(2)(A) means that Congress didn’t want other revocable trusts to be eligible for a step-up in basis?

The more logical conclusion is that Congress wanted Section 1022(e)(2)(B) to be a catch-all provision for trusts for purposes of the step-up, and that all revocable trusts are eligible for a step-up in basis.  That conclusion leads to the further conclusion that Congress meant Section 1022(d)(1)(A) to be broadly interpreted, as qualified revocable trusts are mentioned in both Section 1022(d) and Secton 1022(e), and if Congress had meant the special rules in Section 1022(d) to be an exhaustive list, then there would have been no reason for Congress to have included other trusts in Section 1022(e)(2)(B).

To be conservative and assure the possibility of a step-up in basis for assets held in a revocable trust for someone who dies during 2010, it seems that the Executor or Personal Representative of the decedent’s probate estate and the Trustee of the decedent’s revocable trust should make the election under Section 645(b)(1) to treat the trust as a qualified revocable trust for income tax purposes.  There is the possible risk that a failure to do so would result in no step-up, and the election provides a safe harbor for the step-up.

The same sloppy “thinking” in 2001 that caused this one-year tax law to take effect in 2010 is evident throughout Internal Revenue Code Section 1022.  Who knows what other ideas Congress is working on that would affect estate planning; maybe we would all be better off if the Senate continues to procrastinate.

A hospital discharge does not mean that the patient has recovered fully.  Rather, it means that a physician has decided that the patient has reached a stable condition and doesn’t need to be hospitalized any longer.  Discharge planning is defined by Medicare as a “process used to decide what a patient needs for a smooth move from one level of care to another.”  Medicare requires that the discharge plan be “safe and adequate,” and if you don’t agree with the plan, you can appeal it.  Until the appeal is decided, your family member can remain in the hospital.

Make sure there aren’t any inaccurate assumptions in the discharge plan, especially about what family caregivers are expected to do.  If the discharge is to home, make sure the home care services have actually been set up before the discharge (not just a phone call made by the discharge planner), as any gaps in coverage will immediately fall on family caregivers once your family member has left the hospital.  In a difficult situation involving a senior citizen, getting a geriatric care manager involved can often remove a great deal of stress from you.  (If you’re in need of one, a Certified Elder law Attorney (www.nelf.org) can provide you with a referral.)

If the discharge is to a nursing home, make sure that you feel that the nursing home is located in an appropriate place for visits from family and friends, as a lack of visits may result in corners getting cut and less than adequate care.  While the hospital discharge planner may be able to locate a nursing home that has an available bed, there may be a good reason that beds are available at that nursing home, so you should make your own decision about whether the nursing home is appropriate.  You should personally visit the nursing home.  Print out the Nursing Home Facility Checklist at  http://nursinghomeadmission.com/findahome.php, and through the same page on that website you can check out the Massachusetts and federal ratings of any nursing homes that you are considering.  Don’t feel pressured to make a too-quick decision; again, getting a geriatric care manager involved can reduce your stress level.

Above all else, trust your common sense and don’t let the hospital discharge planner steamroll over you.  If you feel your family member is being pushed out of the hospital too soon, you may be right:  based on the way health insurance works, hospitals make money by refilling beds, not by having existing patients linger in the hospital.

Schumacher’s point: “It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now.”

Brian’s response: I agree with the point about the multi-state estate being complicated, and it is often a good idea to use a trust to avoid probate if you own real estate in other states.  Schumacher’s point about probate being expensive, however, is twisted to make a trust sound like it is always preferable; a trust can also be expensive for the same reasons listed above, as legal fees, Trustee’s fees and other costs must be paid before the assets can be fully distributed to your heirs.

Schumacher’s point: “It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.”

Brian’s response: It’s not so much the probate process itself that takes time, but rather the processes of selling or otherwise dealing with real estate and other assets, and filing income tax returns and estate tax returns, that take time.  Those are all matters that would have to get done even if you had a trust. The issue that probably is the main reason for any estate to be held open for over 18 months is final clearance from estate tax authorities, and that delay has nothing at all to do with the probate process; a trust would also have to be held open while waiting to receive written approval of estate tax returns from the Internal Revenue Service or the Massachusetts Department of Revenue.  Schumacher’s other points about probate are also invalid and are twisted to make a trust sound like it is always preferable.  Assets are not frozen in Massachusetts, and, similar to probate, with a trust nothing can be distributed or sold without the Trustee’s approval.  Similar to probate, if the family needs money to live on, they can make a request to the Trustee, and the Trustee can deny it.

Schumacher’s point: “Your family has no privacy. Probate is a public process, so any “interested party” can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.”

Brian’s response: I agree that a disgruntled heir can contest your will, and in Massachusetts that person may even be given basic instructions early in the probate process on how to do it, so I often suggest a trust to avoid probate if a will contest is thought to be a real possibility.  I generally disagree, however, about how public the Massachusetts probate process is, since the only way for anybody, including an unscrupulous solicitor, to learn what you owned or owed, or who received what from your estate, is to go to the Probate Court during its business hours and to ask to see the probate file; the information being sought may not even be in the file yet, so return trips to the Probate Court could well be needed to get to see that information.  It therefore can take a lot of time and effort on somebody’s part to get to see details in the probate file, even though it can technically be categorized as public.

Schumacher’s point: “Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.”

Brian’s response: Your family also has no control over the Trustee, and the Trustee’s processes will determine how much the trust administration will cost and how long it will take.  The probate process in Massachusetts is fairly simple, and will become simpler on July 1, 2011, when the Massachusetts Uniform Probate Code is scheduled to be fully implemented. With proper guidance, the executor or personal representative of an estate can handle many tasks without incurring large costs, having lengthy delays, or needing to rely much on a lawyer.  In fact, many of the probate estates I’ve handled have cost less than the cost of a living trust.

Brian’s conclusion: As you can see, a writer who is looking to promote trusts can twist everything to make probate sound bad, and to make trusts seem like magic. As I’ve pointed out in an earlier blog post, a choice sometimes has to be made in Massachusetts between avoiding probate and protecting your home from creditors. http://elderlawblog.info/2010/04/02/protecting-your-home-from-creditors-in-massachusetts There is no significant reason to fear probate in Massachusetts, and there are far more costly estate planning issues to deal with, such as (1) On a Massachusetts estate of $1,000,000+, the minimum Massachusetts estate tax is $33,200.  (2) An elderly person has a roughly 10% chance of spending 5 years in a nursing home, at an average total cost in Massachusetts of over $580,000.  (3) A disabled person on SSI who inherits assets directly, instead of through a special needs trust, loses SSI benefits and is required to spend everything all the way down to $2,000 before getting back on SSI.

The form must be completed in its entirety and signed by an attending physician, authorized physician’s assistant or authorized nurse practitioner, in accordance with the instructions on the form.  If a physician’s assistant or nurse practitioner signs the form, the name of the supervising physician must be on the form for it to be validly executed.

Perhaps what Congress was trying to do with 1022(d)(1)(B)(iii) was eliminate certain tax games with powers of appointment.  One such game was to grant a general power of appointment to a spouse to attempt to receive a complete step-up in basis on the assets affected by it.  By making the surviving spouse’s trust property subject to a limited, general power of appointment for debt payment during administration of the deceased spouse’s estate, the surviving spouse’s appreciated trust property would be included in the gross estate of the first spouse to die.  Section 1022(d)(1)(B)(iii) would kill this abusive tax game.

Under Section 1022(e)(2)(A), the step-up in basis is available in 2010 to a trust “with respect to which the decedent reserved the right to make any change in the enjoyment thereof through the exercise of a power to alter, amend or terminate the trust.”  That language, in part, describes a power of appointment that is reserved (as opposed to one that is granted to another person).  Thus, a trust with a reserved power of appointment seems to be deemed “acquired” from the decedent under Section 1022(e).   The problem is that to qualify for the step-up in basis under 2010 tax law, an asset must also be considered to be owned by the decedent under Section 1022(d), and powers of appointment are generally excluded, but if Congress didn’t already believe that a decedent with a reserved power of appointment over a trust owned the trust’s assets at the time of death for purposes of Section 1022(d), then why would Congress have included Section 1022(e)(2)(A)?  Congress is deemed to know that a reserved power of appointment causes the powerholder to be treated during lifetime as the owner of the trust for income tax and capital gains tax purposes under the grantor trust rules in Sections 671-679.  I conclude that a reserved power of appointment in a trust allows the opportunity for a step-up in basis.

What about a reserved power of appointment in a deed? Back in 1990-1992, when the field of elder law was young, I proposed in several articles (including in Estate Planning, NAELA Quarterly and The ElderLaw Report) that a power of appointment could be reserved in a deed to avoid treatment as a completed gift and cause a step-up in basis. Many of such deeds may now be in existence.  Where the gift was incomplete when the deed was recorded, and is not completed until the powerholder’s death, the property is still owned by the decedent for estate and gift tax purposes at the time of death, and passes without consideration at that time, so such a deed may be eligible for the step-up in basis. Still, due to the literal language in Section 1022(d)(1)(B)(iii), it may be considered a stretch to obtain the step-up in basis in 2010, but if all of the parties involved in the deed were to transfer their interests to an irrevocable trust that mirrors the terms in the deed, the step-up possibility would be strengthened. If the holder of the reserved power of appointment in the deed also reserved a life estate, however, the step-up could be obtained via the reserved life estate. See Why DOESN’T a Reserved Life Estate Get a Step-up in Basis under Internal Revenue Code Section 1022?  and  More about Whether Life Estates Are Eligible for a Step-up in Basis in 2010

“The basis step up is limited to property that passes by reason of death. When a life estate is established the legal ownership of the property is separated into 2 fee interests, the life estate and the remainder. Each can be leased, mortgaged and are subject to foreclosure. Therefore, the remainder interest did not pass by reason of death. The passing of title took place when the life estate was retained. All that happened is the remainder interest VESTED upon death. As a result, no step up.” 

These points are well-taken. Our disagreement is zeroed in on the attributes of a life estate.  My point remains that the life tenant has exclusive possession during lifetime, and the home that is the subject of the reserved life estate remains completely controlled by the life tenant.  Use and possession by the remainderpersons is prevented until the life tenant’s death. While theoretical separation of the interests may occur, no actual separation occurs, and the theoretical separation does not give a present, usable benefit to the remainderpersons, as the life tenant controls whether the actual separation can occur by sale or partition.  The remainderpersons don’t have anything real until the death occurs, and they receive their usable interest without consideration only as a result of the life tenant’s death.

Section 1022(e)(1-3) covers bequests, devises, inheritances, revocable trusts and many irrevocable trusts, so there isn’t much left to be covered by Section 1022(e)(4), which includes “Any other property passing from the decedent by reason of death to the extent that such property passed without consideration.” What type of ownership interest would Section 1022(e)(4) be covering that isn’t already covered by (1), (2) and (3)? If life estates were meant to be excluded, perhaps Section 1022(e)(4) would only cover assets held jointly or subject to a transfer-on-death designation, but if Congress was intending to create such strict limitations, those interests could have been specifically mentioned.  The language of Section 1022(e)(4) seems to indicate that Congress intended it to be a broad category.

I did state that my position is not a slam dunk, but I’m still not buying that life estates were intended to be excluded from the possibility of a step-up in basis.

To qualify for the step-up in basis under 2010 tax law, an asset must be considered to be owned by the decedent under Section 1022(d) and considered to be acquired from the decedent under Section 1022(e).  To determine whether a reserved life estate is entitled to a step-up in basis, the issue needs to be broken down into 2 questions.

Question 1:  At the time of death, does a decedent “own” the property which is the subject of a reserved life estate?

It is true that Section 1022(d) does not include life estates in its description of special rules on what is considered owned by the decedent, but life estates could be covered by the general rule.  Powers of appointment are less commonly utilized and not as well-known, but were expressly excluded under Section 1022(d)(1)(B)(iii), so Congress knew how to exclude certain planning techniques when it wanted to do so. If life estates were intended to be excluded, why were they not specifically mentioned?  A power of appointment is not a possessory interest, yet Congress took pains to exclude it from the possibility of a step-up in basis.  It seems illogical for Congress to have specifically excluded a nonpossessory interest but to be silent if it also intended to exclude a possessory interest such as a life estate.  Further, it is possible that the phrase “at the time of death” could be interpreted to exclude a life estate, because death terminates the interest, but since a reserved power of appointment was specifically mentioned and would also terminate at death, it doesn’t appear that the “at the time of death” phrase was intended by Congress to mean “after” death.  I therefore conclude that Congress must not have intended to exclude reserved life estates from the definition of what is owned by a decedent at the time of death.

I cannot speak for all 50 states, but under Massachusetts law, the life tenant has exclusive possession of the entire property during the life tenant’s lifetime.  The life tenant is entitled to all the rents and profits from the property and pays all current real estate taxes. Remainderpersons do not have the right to petition for partition because they do not have a present possessory interest in the premises.  At the time of the life tenant’s death, the life tenant has an ownership interest to the exclusion of the remainderpersons, and a reserved life estate may therefore fit the ownership test in Section 1022(d).

Question 2:  Does a remainderperson “acquire” from the decedent the property which is the subject of a reserved life estate?

If you agree with the analysis in Question 1, then this question probably poses little obstacle to the step-up in basis. The language in Section 1022(e)(3) includes “property passing from the decedent by reason of death to the extent that such property passed without consideration,” and where the property passes to the remainderpersons without consideration upon the life tenant’s death, that description could easily include a reserved life estate.  A question could arise on whether they received it “from” the decedent, but the possession does transfer based on the decedent’s actions.  The open issue on the step-up in basis would be whether, since the remainder interest was already vested, it was the entire value of the property that was “acquired,” or merely the actuarial value of the life estate at death; still, since the entire possession transfers upon the life tenant’s death, a strong argument could be made for the full step-up in basis (subject to the other limitations in the law of a total of $1,300,000 for most estates).

Conclusion:  It’s not an absolute slam dunk that life estates are entitled to a step-up in basis under Internal Revenue Code Section 1022, but there is at least a solid argument that they weren’t excluded and that they fit the definition of what is entitled to a step-up.

Unless a person who made a transfer of the home is expected to die well before the end of 2010, it may be that the best course of action would be to do nothing.  We’re going through a temporary change in the law, and there have been indications from Congress that the federal estate tax laws and accompanying capital gains tax laws may be returned to 2009 law and made retroactive to the beginning of 2010.  For someone is expected to die soon, however, perhaps a change should be made. (Clients of mine in this situation should contact me immediately.)

Under the applicable 2010 tax law, known as the modified carryover basis rules, an estate can opt for a step-up in basis for certain assets, and to see whether these are eligible, Internal Revenue Code section 1022 applies.  The most common types of transfers of the home that were made for Medicaid planning purposes in the past were (1) joint tenancy with right of survivorship, (2) a reserved power of appointment in a deed, (3) an irrevocable income-only trust, which often includes a reserved power of appointment, and (4) a reserved life estate, use-and-occupancy agreement or informal understanding.  To qualify for the step-up in basis, an asset must be owned under Section 1022(d) and acquired under Section 1022(e), so each type of transfer must be analyzed.

Internal Revenue Code section 1022 (d)(1)(B)(i) allows at least a partial step-up for some joint tenancies; (d)(1)(B)(iii) denies the step-up for a reserved power of appointment, presumably only in a deed.  Section 1022(e)(2)(B) allows the step-up for some irrevocable trusts, including a power to alter or terminate the trust, which would seem to include a reserved power of appointment in an irrevocable trust. 

It has been questioned whether a life estate is entitled to a step-up in basis.  Several blog commentators have written that a life estate is not eligible for the step-up, but many of them seem to be parroting each other and not displaying their analysis.  Section 1022(e)(3) seems to include a reserved life estate but not a use-and-occupancy agreement or informal understanding.  The language in (e)(3) includes “property passing from the decedent by reason of death to the extent that such property passed without consideration,” and where the property passes to the remainderpersons upon the life tenant’s death, that description could include a reserved life estate.  Further, under Massachusetts law, the life tenant has exclusive possession of the entire property during the life tenant’s lifetime, and may therefore fit the ownership test in Section 1022(d).  Thus, it appears to me that a Massachusetts life estate can be eligible for a step-up in basis.

The National Academy of Elder Law Attorneys has written to the IRS for clarification about whether a life estate or an income-only irrevocable trust is entitled to a step-up in basis under Section 1022.  http://www.naela.org/MemberPages/documents/IRC_1022_letter_3_31_10.pdf  It’ll be interesting to see if NAELA receives an answer, but my general feeling is that Congress will eventually act, and that this modified carryover basis issue will eventually become a non-issue.

I was the expert witness hired by the persons who were challenging these fees on the First and Final Account.  My opinion was that what they needed to do on the temporary guardianship should have amounted to $20,000-40,000, and I spent nearly 3 full days on the witness stand being cross-examined.  The Temporary Guardian and his lawyers had initiated divorce, annulment and estate planning actions without even attempting to determine whether Kenneth Simon would have wanted these actions.  In fact, the divorce action was filed on the very day that the Temporary Guardian was appointed, and the Temporary Guardian had admitted at trial that Kenneth Simon had told him when they first met that everything was fine between himself and his wife.  The judge agreed with my opinion that Kenneth Simon’s preferences should have been first and foremost, and that the doctrine of substituted judgment (not the best interests standard) should apply because marriage and estate planning issues involved Kenneth Simon’s personal rights. 

What is important about this case is that it confirms substituted judgment as the proper legal standard to be applied in Massachusetts whenever a Guardian or Conservator is making any type of personal decision for a person who has any history of making decisions or expressing preferences. Without delving into what a person would want, you cannot change somebody’s estate plan, force a Christian Scientist to undergo routine medical treatment, change somebody’s religion, or, as happened here, force a dying man to divorce the convicted prostitute he knowingly and willingly had married a year earlier. 

The judge’s decision has been appealed,  so we will undoubtedly be hearing much more about this case in the future.

In a joint letter dated April 15, 2010, the Chairs of the ABA Tax Section and the ABA Real Property, Trust and Estate Section had requested that the Senate Committee on Finance hold  a hearing on federal wealth transfer taxation.  Given the possibility that the federal estate, gift, generation-skipping transfer and adjusted basis tax laws may be repaired retroactive to the beginning of 2010, serious attention by the U.S. Senate is already long overdue.

http://www.abanet.org/tax/pubpolicy/2010/Letter_Regarding_Hearings_on_Federal_Wealth_Transfer_Taxes.pdf

While many transfers of the home are subject to a period of disqualification from payment of nursing home costs by the state Medicaid program, some transfers can be made even after a nursing home stay has begun, and are immediately safe under federal law. (Other exceptions, especially in California, may apply under state interpretations of the federal law.)

One such permissible transfer is to the elder’s spouse. If one spouse becomes institutionalized, the home could probably be deeded to the spouse remaining in the couple’s home. This plan may not be very helpful to the family if the spouse who is institutionalized later receives the home back by will. Married couples that wish to have such action taken in case one of them becomes incompetent should have durable powers of attorney empowering each other to transfer the home.

Another permissible transfer is to (presumably reward) a child who spent no less than the 2 years immediately prior to the client’s institutionalization living in the client’s home and who took care of the client in the client’s home. The care must have been of the type which kept the client out of a nursing home. Since the state Medicaid program makes the decision as to whether these requirements were met, the child would be well-advised to keep detailed records during this period.

Another permissible transfer is to a child who is a minor or who is blind or disabled, or to an irrevocable for the benefit of a disabled child.

Finally, a transfer could also be made to a sibling who has an equity interest in the home and who has lived there for no less than one year prior to the client’s institutionalization; this exception could arguably apply if the client and sibling were co-owners of a multi-family home.

Even if the exceptions outlined above do not apply to the situation, in some cases there may be other steps that can be taken even after a nursing home stay has begun.

In trust law, there is no such thing as “one-size-fits-all.”  Trusts must be designed to meet the particular concerns of the person whose assets will be placed there.  Two of the major non-tax concerns of many elderly persons in Massachusetts are probate avoidance and Medicaid (known in Massachusetts as MassHealth).

Revocable Trusts

Although the assets of just about any revocable trust will avoid probate, the assets of these trusts are never preserved for Medicaid purposes if a nursing home stay eventually becomes necessary and a MassHealth (i.e., Medicaid) application is filed.  All of the assets of a revocable trust are deemed countable, which in MassHealth jargon means the assets must be spent for the care of the nursing home resident.

The home of a MassHealth applicant is usually considered noncountable, but if it is in a revocable trust, in Massachusetts it is treated the same as any other asset.  The home of a MassHealth applicant that is in a revocable trust must be sold and the proceeds spent on the care of the nursing home resident.  Any exemptions that the home might have received, such as for the MassHealth applicant’s spouse and certain children or siblings, is lost by having the home in a revocable trust.

Many elderly persons go to free living trust seminars, and are “sold” the benefits of probate avoidance. In my opinion, what goes on at those seminars (and the free hour with the lawyer afterwards) is nothing more than a sale.  The sale is often a reddish binder that contains documents that include a revocable trust. In my recent experience, both spouses are co-Trustees of each other’s revocable trusts. The problem is that if one of them becomes mentally incapacitated, we’re stuck with 2 trusts that each have an incompetent co-Trustee, and have to go through extensive steps to get the incompetent Trustee removed from the position.  In my experience, the married couple was not informed during the sale process about what would happen if one of the spouses eventually needed nursing home care.

The bottom line is that revocable “living” trusts are easy sales to be made to elderly persons by inept, one-size-fits-all planners or online document banks, but do not meet the MassHealth concerns of the elderly persons who cannot afford or qualify for long-term care insurance.

Irrevocable Trusts

Although the assets of just about any irrevocable trust will avoid probate, the assets of these trusts are often not preserved for MassHealth purposes in Massachusetts if a nursing home stay eventually becomes necessary and a MassHealth application is filed.

Since April 1, 1990, MassHealth regulations have provided that if a Trustee of an irrevocable trust can give assets back to the original owner, and if a MassHealth application is filed by or on behalf of the original owner, the assets of the trust are deemed available to the nursing home resident, and render the elderly person ineligible for MassHealth. This law applies retroactively to irrevocable trusts created before the Massachusetts regulation was adopted. The impact of this law on irrevocable trusts means that many older irrevocable trusts do not meet the MassHealth concerns of the elderly persons who cannot afford or qualify for long-term care insurance.

Fixing Bad Trusts

In attempting to fix any MassHealth problem caused by a trust, a transfer of the assets causes a 5-year MassHealth lookback period unless the transfer of the assets goes back to the original owner.  It can be fairly simple to fix the problem if a revocable trust is the cause of MassHealth ineligibility, since the original owner can revoke the trust and get the assets placed back into his/her name, but if the original owner is mentally incapacitated at that time, revoking the trust might not be so easy

It is often difficult to fix the problem if an irrevocable trust is the cause of MassHealth ineligibility. The MassHealth problem caused by any irrevocable trust is completely dependent on the provisions of the trust, and the method of fixing the problem varies from trust to trust. Usually the elderly person is not the sole Trustee, and neither the Trustee nor the elderly person has the power to get the assets placed back into the elderly person’s name. In many cases, a Massachusetts Probate Court proceeding known as a trust reformation is needed, and in other cases, a Probate Court petition to terminate the trust due to frustration of purpose is the better procedural move.

What is a Declaration of Homestead?

A “Declaration of Homestead” is a simple and inexpensive Massachusetts legal document that can protect part (or perhaps all) of the value of your home from most of your future creditors and lawsuits against you. Unless you own a mobile home, it must be recorded in your county at the Registry of Deeds or the Registry District of the Land Court. If you own a mobile home, it must be filed at your Town Hall or City Hall.

Why should I have a Declaration of Homestead?

If you do not have a Declaration of Homestead in place, and are sued and lose, there is a chance that you could lose your home if your insurance does not fully cover the lawsuit. If you have a Declaration of Homestead in place, and are sued and lose, your home may instead be totally protected during your lifetime (and, depending on the type of homestead, your spouse and minor children may also receive protection).

Other than in foreclosure actions for failure to make mortgage payments, cases where a person gets sued and loses his or her home are rare. Unfortunately, until your case is tried and settled, you may not be sure that your home is safe. You cannot know until that time whether the verdict would be in excess of the amount which would be paid by your applicable insurance (i.e., homeowners insurance for an accident at your home, or automobile insurance for a motor vehicle accident).

Even if you are represented by a good lawyer who assures you that you have nothing to be worried about, you would probably be nervous if you were sued, and for at least a short time you would probably fear the worst. Knowing that you have taken action to protect your home would undoubtedly lessen your fears, so, if you are eligible, why not file a Declaration of Homestead? Just about anyone who owns a home is eligible for one of the three types that exist.

What is a regular Declaration of Homestead?

A regular Declaration of Homestead can be made by almost anyone. Until November 1, 2000, it protected the first $100,000.00 of the home’s value for you and your family; from November 2, 2000 through October 25, 2004, it protected $300,000.00. From October 26, 2004 on, it has protected $500,000.00. It gives your surviving spouse protection until his or her death or remarriage, whichever occurs earlier. It also gives each child of yours protection until he or she reaches the age of 18 years or becomes married, whichever occurs earlier.

Can a regular Declaration of Homestead ever pose any problems?

You can release a regular Declaration of Homestead at anytime and eliminate the rights that it gives to your spouse and minor children. You therefore should not have any problems if you later want to sell or mortgage the home.

If you die and an unmarried child of yours who is under the age of 18 years continues to live in the home, however, a regular Declaration of Homestead could cause your surviving spouse to have problems in selling or mortgaging the home. These problems occur because the spouse’s rights will be in conflict with the child’s rights. Thus, a married person who has young children should not make a regular Declaration of Homestead without consulting an attorney who is experienced in this area of law.

What is an Elderly or Disabled Declaration of Homestead?

Until November 1, 2000, an Elderly Declaration of Homestead protected the first $200,000.00 of the home’s value; from November 2, 2000 through October 25, 2004, it protected $300,000.00. From October 26, 2004 on, it has protected $500,000.00. Only a person who is at least 62 years of age can file it.

Until November 1, 2000, a Disabled Declaration of Homestead protected the first $200,000.00 of the home’s value; from November 2, 2000 through October 25, 2004, it protected $300,000.00. From October 26, 2004 on, it has protected $500,000.00. Only a person who has a current physical or mental impairment which is considered a disability by the Social Security Administration can file a Disabled Declaration of Homestead. While the other types of Declarations can be very simple to prepare, the disabled type is more complicated because it is not valid unless you produce and record or file written proof of the current disability.

Are Elderly or Disabled Declarations of Homestead fairly new?

The elderly and disabled types have only been available since 1987. If you recorded or filed a Declaration of Homestead prior to 1987 and wish to take advantage of the additional protection that an elderly or disabled type can give you, you can record or file a new one.

Must I record or file a new Declaration of Homestead to increase my protection to the new amount?

No, the law has automatically increased each type of Declaration of Homestead to $500,000.00 of protection, although not against a creditor whose enforceable rights existed before the change in the law.

Can more than one person make a Declaration of Homestead?

Generally, only one owner of the home can make a regular Declaration of Homestead if the home is owned as joint tenants or as tenants by the entirety. More than one person can make an Elderly or Disabled Declaration of Homestead, and increase their protection.

What does a Declaration of Homestead not cover?

No type of Declaration of Homestead protects any of the home’s values against a pre-existing debt or mortgage, but it can protect you against some lawsuits. Further, no type of Declaration of Homestead protects any of the home’s value against the possible impact of nursing home costs, so upon an application for MassHealth, the home could still remain exposed and at risk.  (The only way to protect your home in case you have to go into a nursing home is to make some sort of legal transfer of the home. To protect the home fully under current law, such a transfer usually has to be made 60 months before you have to enter a nursing home; there are exceptions where the home can be immediately safe for certain children, siblings and disabled persons.)

My home is in a revocable trust, so isn’t it already safe from creditors?

No, a home that is in a revocable trust may or may not have protection against the creditors of the person who established the trust. Case law has gone in both directions as to whether a person whose home is in a revocable trust can file a Declaration of Homestead. Because of the uncertainty of whether a home in a trust is entitled to a homestead exemption, deeding your home into a revocable “living” trust is just about the worst move you can make if protection from creditors (including nursing homes) is a primary concern. Unfortunately, revocable “living” trusts may often be pushed on people (such as at free trust seminars) without full explanation of this legal issue.

What happens if I am sued and my home is worth more than the amount protected by my Declaration of Homestead?

If your home is worth more than the amount which is protected by our Declaration of Homestead, anyone who sues you may still be able to force a sale of your home (assuming that your homeowners or automobile insurance does not fully cover the lawsuit). After the sale, however, you would be able to walk away with the protected amount.

Should everybody file a Declaration of Homestead?

As our society seems to be becoming more litigious all the time, protecting your home against future lawsuits may be of great psychological (if not financial) importance to you. Filing a Declaration of Homestead is not the only way to protect your home, nor is it necessarily the best way, but it at least affords a good deal of protection and peace of mind. I don’t believe there is ever a one-size-fits-all answer to any estate planning question, but anyone who has not yet made one of the three types of Declarations of Homestead described above should strongly consider doing so.

Any MassHealth application can be retroactive to the first day of the third month prior to the application. Based on the date that MassHealth is needed, in many cases you must keep the original application alive. If an applicant receives a denial due to missing verifications and mails in missing verifications within thirty (30) days after the denial, that action is treated as a new application, causing a new application date, which affects the maximum time period that MassHealth can be retroactive. A later application date can also cause the date of payments of medical or nursing home bills to become important to whether retroactive MassHealth benefits will be allowed.

For example, suppose Jane applies for MassHealth on December 19, needing coverage as of September 20. Under this application, MassHealth can be retroactive to as early as September 1. Only the original application, however, will obtain the needed retroactivity. If Jane receives a denial on February 5 due to missing verifications and submits one or more of them during February, a new application is deemed to exist, and its maximum retroactive date would be November 1.

The treatment of previously-paid expenses can be affected by the timing of the MassHealth application. Medical and nursing home expenses that are less than ninety (90) days in the past are allowed as part of the spenddown process whenever they are paid, but if those expenses precede the MassHealth application by more than ninety (90) days, then a different rule can apply. If we also suppose in the example in the previous paragraph that Jane sold stock and received the proceeds on December 3 and immediately paid the nursing home at its private pay rate for the September 1-September 20 period, that action would have no impact on the effective retroactive date of MassHealth coverage for the original application. The result would be difficult if the denial of the original application were not appealed. Under a new application, that action could change the maximum retroactive date of the later application to December 3.

There is a MassHealth regulation which allows a successful appeal of a denial to keep the original application alive. If Jane appeals the denial instead of just sending in the missing verifications, a new application would not be deemed to exist, and the original application would be preserved, thereby allowing MassHealth coverage retroactive to the earliest possible date.

When these procedures are not followed, the result can be that the nursing home will not be paid far enough retroactively by MassHealth and the MassHealth applicant will be responsible for the unpaid amount. As a last resort, the only possible way to cover the shortfall could be to make a request to MassHealth that the unpaid nursing home bill be paid over time via deductions from Jane’s monthly income. Although MassHealth would have been required to cover the bill if the appeal process had been correctly followed, there would be no guarantee that MassHealth would help Jane and the nursing home on previously-disallowed nursing home bills.