Category Archives: Estate Planning

How do I get a free nursing home?

“How do I protect my assets so that the state doesn’t get everything if I have to go into a nursing home?” This is, by far, the most common question that I answer.

I prepare many living trusts for clients, so this question comes up almost every time I meet with a client. It’s really hard to answer, and every time I hear it, I kind of cringe. The answer will not be what people want to hear. As I explain, clients stare at me with a glazed over look like, does this guy know what he’s talking about?

Here is what people are afraid of: The average cost of a nursing home is $219.00/day and rising. That’s almost $80,000.00 per year. The average nursing home stay is 2.5 years.

No one’s fondest dream is to see their assets depleted by a nursing home. But, in this Tea Party age with constant calls for limited government spending, I am always surprised that so many people think that long-term nursing home care is something that they should not have to pay for, or that they can easily qualify for by a simple legal maneuver.  I think a person’s money should be used to make them comfortable in the best environment that is affordable. In reality, medicaid is a safety net program for the truly indigent.

On the other hand, health insurance covers you when you are sick… why should long-term nursing care be any different from  having your gall bladder removed or any other illness? I don’t know the answer to these tricky questions.

But here are some of the answers to why it is now hard to qualify for medicaid:

Does my living trust “protect” my assets so that I can get medicaid if I need it?

No, a living trust will not help qualify you for medicaid.

Is there a type of trust that I can use to qualify for medicaid?

Yes, there is an irrevocable, medicaid income-only trust. You cannot be trustee. You can’t change the trust. You can only get the income from your assets. I rarely use these because they are very restrictive.

What assets can I keep and still qualify for medicaid?

You can keep $2000.00 in assets and a prepaid funeral. A house is exempt too, but only temporarily. After 6 months in a nursing home, it is presumed you will not return to the home and then a lien can be placed on the house. (There are other rules for married couples.)

Can I give away my assets and qualify for medicaid?

If  you have ESP and know when you will need medicaid and don’t mind parting with all of your assets then, yes, if you gift away all of your funds 5 years or more before you need a nursing home, you will get the free medicaid nursing care. Other than that, it is very hard to protect your assets in such a way that you will qualify for medicaid.

Does medicaid keep my pensions and social security if I qualify?

Medicaid will take all social security income, pensions and other income except for $30.00/per month.

Why is it harder now to gift assets and qualify for medicaid?

This has to do with the so called “penalty period.”  When someone applied for medicaid under the old law, your checking accounts and other bank statements were checked for the last 36 months for gifts or transfers to family members or others. This is called the “look back” period. Medicaid did not care about gifts made more than 36 months prior to the medicaid application. So if a gift of $50,000 was made more than 36 months before the medicaid application, the applicant would qualify for medicaid. If they found gifts within the 36 months then there was a “penalty period.” Under the old law, the penalty period started when the gift was made. In Illinois, the penalty amount was about $5000.00 per month, so if you gifted $50,000.00 within the 36 month look back period, you were penalized for 10 months from the date that you made the gift and after that you would qualify for medicaid. Confused yet? If not, you are a savant…It was easy under the old law to made gifts over time and still qualify for medicaid.

Now, the look-back period is 60 months. Worse yet, when a gift is made, the penalty period now starts when the client enters the nursing home. So, if a client gifts $50,000.00, the penalty period of $5000.00 per month will make the client ineligible for medicaid for 10 months from the date they enter the nursing home. This makes gifting away assets an almost unusable strategy.  The current laws encourage people to buy long-term care insurance and make it hard for those with substantial assets to gift the assets and still qualify for medicaid.

So how am I supposed to pay for a nursing home if I need it?

There are only three ways to pay for long-term nursing care:

1. Use your own funds to pay for care, or self-insure.

2. Buy long-term care insurance to cover some, or all, of the charges. Some clients buy long term care insurance to cover their expense for 3 to 5 years, which carries lower premiums than a lifetime benefit.

3. Have medicaid pay for your care.

Should I buy long-term care insurance?

If you can self-insure, then you won’t need long-term care insurance.

Anyone with assets of $1 million or more can probably safely self-insure.

Those with assets of $1 million or less, should consider some sort of long-term care insurance.

The cost of probate

I am a fan of living trusts. Trusts avoid probate. Probate is not the chamber of horrors that it is sometimes made out to be. But, all things being the same, you are better off side-stepping it  if possible.

In Illinois, probate is not terribly expensive since we do not have a fee schedule that sets mandatory executor’s and attorney’s fees.  Our  probate statute allows ”reasonable” attorney’s fees. Generally, a probate case involves a minimum of two court appearances by the attorney.  Attorney’s fees in a standard probate range from a low of $1500.00 to a high of $3500.00. In addition to the attorney’s fees there are filing fees and costs. Here are the current costs in Cook County for a testate (with a will) probate:

$314.00 Filing fee to Clerk of Court

$180.00 Claims Notice in Newspaper

$20.00 Copies of letters of office

$514.00 Total Costs

Generally, the total cost of a probate (including costs and attorney’s fees) will be as low as $2000.00 or as high as $4000.00. This  would not include any tax advice, adminstration of the assets after the probate is opened or asset transfers. This is just to open and close the estate.

With a living trust, these costs are avoided and the client can go straight to collecting and distributing the assets without the added cost of the probate.  Often, the cost of setting up a living trust is just a little more than the cost of the probate filing fees alone, so it makes sense to skip the probate by using a trust.

Estate tax vanishes Jan 1: But watch out for capital gains tax

If you thought inheritance taxes were complicated before, just wait for January 1.

The inheritance tax is abolished starting January 1. But it only stays abolished until December 31, 2010. On January 1, 2011, the old inheritance tax system returns, except that the amount that is free of inheritance tax changes to $1 million per person. Make sense? Of course not.

There is a new wrinkle that makes it all even more confusing. It’s this: Under the “old” system that expires December 31, 2009 and the new system that starts January 1, 2011, assets that the deceased owned received a “stepped-up basis.” This  means that the value of an asset is reset to its value on the deceased’s date of death. For example, if a client bought a house in 1980 for $100,000 then died in 2009 when the house was worth $300,000, and the house was sold after the deceased’s death, so no capital gains tax was due when the asset was sold because the “basis” or cost of the house was increased to $300,000. This applied to all property owned by the deceased.

Well, the stepped-up basis rules all change on January 1, 2010. Now, “stepped-up basis” is replaced by the term “carry-over basis.” This means that the basis of the deceased property owner carries over to the heirs and is not stepped-up (but of course there are exceptions, naturally).  If the asset is sold, capital gains tax must be paid by the heirs.

The new rules on carry-over basis are:

  1. $1.3 million or less in property still gets a stepped up basis.
  2. Any amount inherited over $1.3 million does not get a stepped-up basis. If this property is sold, capital gains tax will be paid by the heirs on the gain.
  3. An additional $3 million can be left to a surviving spouse and will get a stepped-up basis.

Complicating matters even more, Illinois decoupled from the federal inheritance tax system for a few years. This made is possible for large estates of over $2 million to pay inheritance tax to Illinois, but not to the U.S.  Thankfully,  for 2010, there is no Illinois inheritance tax to worry about.

What to make of all this? It is wise to review your will or trust with your attorney to address these complicated and ridiculous rules to be sure that you don’t call into a carry-over basis trap.

Two steps and your will is done


Clients are short on time. Couples with young children seem the most time-starved.

In the past, it generally took two office visits to have a will done for a client. It was hard to coordinate times to meet and I think multiple office visits discouraged clients from signing wills and trusts.

Now, I’ve simplified will preparation into a two step process:

1. Fill out my online form. I call the client to discuss it by phone.

2. Wills are sent by email in pdf form and a hard copy is mailed to the client’s home with signing instructions.

It works wonderfully for those in time crunch mode. By making it easier to sign a will, maybe more than 31% of couples (the current sad stat) with young children will sign a wills.

Convenience bank accounts may cause probates

Starting January 1, “convenience accounts” will be able to be set up at your bank. These are alternatives to joint bank accounts. This development is good and bad.

It’s good because we have endless problems with joint bank accounts. Many times, clients add a joint tenant, usually a family member — but sometimes a non-family member, to a bank account. Upon the client’s death, the funds in the joint account snap automatically to the surviving joint tenant. Most clients don’t realize that this will happen. They think that their will or trust will control the bank account, but it doesn’t control it at all. Many times (about 50% of the time) the joint tenant keeps the funds because he thought he was owed something or did more for the deceased than the other heirs. I’ve seen some pretty nasty family rumbles over this issue.

The new convenience accounts will allow the additional party to make deposits and withdrawals on the account. Upon the client’s death, the convenience account will NOT snap to the convenience signer, but will be controlled by the deceased’s client’s will or trust.

The bad part of this: If the convenience account is $100,000.00 or more, it will cause a probate estate to be opened.  I think that there will be quite a few probates down the line from this new law. Many clients are “advised” by the bank representative on how to title accounts and we already have POD, TOD, in trust for, living trust and joint accounts. It is hard to clients to digest all of this and I think that clients will assume, wrongly,  that the convenience account avoids probate.

The other bad part: The convenience account can be cleaned out by the convenience signer, much like a joint account. Many clients do not realize that a joint signer on a bank account can help themselves to the entire account at any time. It’s rare, but occasionally the joint tenant (who didn’t furnish any $ to the account)  can make off with all the cash in the account and they don’t have to repay it. The convenience signer can withdraw some or all of the funds from a convenience account, but there would be a strong presumption that the funds were the account owners since and it might be easier to get the funds back than if a joint account were raided.

Supreme court gives retirement plan to ex-spouse

Couple is married and Mr. makes Mrs. the primary beneficiary of his retirement account.

Mr. & Mrs. get divorced.

Mr. does not change his beneficiary and then dies.

The U.S. Supreme court recently ruled in Kennedy Estate vs. Plan Administrator for DuPont Savings that the ex-spouse gets 100% of the retirement plan because the beneficiary designation trumps the divorce decree .

Moral of story: Always update your beneficiary designations for retirement plans, especially after a divorce.

Illinois 09 inheritance tax trap may be no more

The Illinois House passed, and the Senate is reviewing, a bill that would prevent estate tax from being owed on the first to die of a husband and wife with a large estate. It looks like it will pass the Senate easily.

Technically, the bill does this:

“Amends the Illinois Estate and Generation-Skipping Transfer Tax. Provides that the State tax credit for the estates of persons dying after December 31, 2005 and on or before December 31, 2009 includes a reduction for qualified terminal interest property. Effective immediately.”

That’s a mouthful, but it means that there would be no estate tax due on the first death of a married couple. The history of the bill is here. I previously wrote about this problem and advised couples with large estates to amend their trusts to include a state marital trust.

I’m glad to see that they are patching up this mess before tax is paid by too many widows/widowers.

Large trusts may owe IL inheritance tax in 09


(4/9/09  Update: There is a bill pending in the Legislature that would eliminate this problem.)

For 2009, the amount that is free of estate tax under federal law is $3.5 million.

For 2009, the amount that is free of estate tax under Illinois law is $2.0 million. Illinois has “decoupled” from the federal estate tax system for 2009 (this only applies to 2009; after that we don’t have to worry about this problem).

This creates a potential inheritance tax time bomb for married couples with large estates. (This problem does not affect single, divorced or widowed people. They would, however, be wise to considering gifting to reduce their estate under $2.0 million to avoid the Illinois inheritance tax).

Who should worry about this? Married couples, who have A/B living trust and who have large estates.

How large of an estate? You should check into this if your estate is over $2 million. If your assets are under $2.0 million you don’t have to worry about it. For the most part it will affect couples with estates of about $3.0 million or so

What is the problem? The problem will occur on the first to die of a married couple, where the living trust of the deceased person contains more than $2.0 million.

Estate taxes may have to be paid on the first death. This is bad. No one wants to pay estate taxes, especially on the first death. The problem is the “funding formula” used in so called A-B living trusts that sets up the family and marital trusts. It says to put up to the federal exemption amount of $3.5 million in the family trust when the first spouse dies. Illinois will tax any amount over $2.0 million that goes into the family trust.

Unless the funding formula is amended to minimize inheritance taxes, it will trigger estate tax on the death of the first spouse.

How much would the tax be? If the trust of the deceased person has $3.5 million, then $2.0 million going to the family trust is not taxed by Illinois, but $1.5 million is taxed by Illinois. If the full $3.5 million goes into the family trust, the surviving spouse pays $229,200.00 in taxes to the state of Illinois. That’s no drop in the bucket.

What can I do to avoid paying this? The living trust has to be amended to add a third trust, so the client will have an A-B-C trust. The C trust is a “state marital trust” that prevents Illinois estate tax from be due on the first death in a married couple. It lets the backup trustee decide how much to put in the family trust and how much to put in the state marital trust and thereby avoids any tax on the first death.