Vogel Law Firm, Ltd.: estate planning law firm serving families throughout the State of Wisconsin

Friday, August 1, 2014

Life Estates and Medicaid Planning - Wisconsin Estate Recovery Program

For years, lawyers have used a particular planning technique to protect a client's assets from potential long-term care costs.  The idea used by attorneys is to have the parent change the ownership structure for their real estate.  Generally, a person owns their real estate in what is referred to as fee simple absolute.  This means that parent(s) own the entire parcel of real estate, and no one else has an ownership interest in the property.  In the elder law arena, lawyers would have the parents retain a life estate interest in the property and deed a remainder interest to their children, or, if the lawyer was more sophisticated, he or she would use an irrevocable trust to own the remainder interest.

If this life estate interest was created, it would begin the five-year look-back period related to Medical Assistance planning also referred to as Medicaid planning.  Assuming the parent(s) did not need long-term care services within five years of doing this transfer, then the property would no longer be considered an available asset and would not have to used to pay for the parent's long-term care cost.  In addition, at death, the parent's life estate interest would vanish, and the children or the irrevocable trust would own 100% of the real estate and would be able to move forward with the sale of the real estate and the division of the proceeds from the sale.  Essentially, the state or federal government would have no means of making a claim against the parent's estate, because the life estate interest vanishes as of the parent's date of death. 

This planning has been considerably disrupted by recent law changes made in the State of Wisconsin.  For some time, many states have held that the retention of the life estate interest is still a countable asset or is an asset that can be covered against after the parent's date of death.  Wisconsin has now become a state that will impose an Estate Recovery Claim against the value of the life estate after the parent's date of death.  This means that the entire value of the property will not be protected from a potential Medicaid reimbursement claim in the event the parent does qualify for Medicaid. 

For example, assume a parent creates this life estate/remainder interest ownership structure for their family farm.  During the parent's life time, the parent enjoys the use and income from the farm.  Eventually, the parent's health fails, and the parent needs to enter a nursing home.  Five years has expired since the parent transferred the remainder interest to the children or the irrevocable trust.  The parent qualifies for Medicaid, and Medicaid begins paying for the parent's cost of care at a local nursing home.  The parent ends up living in the nursing home for fourteen months.  Medicaid pays a total of $70,000.00 toward the cost of the parent's care.  During this time, the parent never had to pay for the cost of the nursing home.  However, after the parent's death, the State of Wisconsin has an Estate Recovery Program that will assert a claim against the value of the life estate interest in the family farm.  The value of the life estate interest is determined by an actuarial table contained in the Medicaid eligibility handbook that is published by the State of Wisconsin.  As the parent gets older, the life estate value decreases.  Unfortunately, the life estate always has some value as of the parent's death. 

The good news is that for all life estates created prior to August 1, 2014, the old rules will apply.  This means that the State of Wisconsin cannot make a claim against the life estate value after the parent's death.  On the contrary, if the life estate interest is created after July 31, 2014, the State of Wisconsin will be able to make a recovery claim against the value of the life estate interest in the real estate.  This is a significant drawback to this type of planning.  While the value of the remainder interest will potentially be protected, assuming the five-year timeline has expired, the value of the life estate interest will not be fully protected.  The State of Wisconsin will be able to make a claim against the value after the parent's death.  This is important information to understand, because there are countless properties out there with life estate/remainder interest ownership structures. 

The last few weeks have been interesting in my practice, because I have been assisting several people with the creation of life estates to take advantage of this planning that will soon disappear.  If you find that lawyers are still using this life estate/remainder interest planning technique after July 31, 2014, you will want to make certain that your clients understand that the full value of the property will not be protected through this type of planning.  I am the first to admit that there are reasons for still doing the planning, but the tremendous benefit of protecting the entire value of the property after the expiration of the five-year look-back period is now not one of them.   

Social Security Benefits

Repeatedly, I am asked by my clients for information related to Social Security benefits.  In fact, just yesterday, it happened again.  The benefits available through the Social Security Administration for retired persons are complex.  There are a plethora of options available for those who have reached retirement age.  Questions arise as to whether a person should opt-in and take early benefits at age 62, should they wait until full retirement age, should they wait even beyond full retirement age, should one spouse apply and the other spouse not apply. 

In the Social Security arena, couples especially have many options available to them as to when and how they claim benefits.  Recently, a few different web sites have been created by financial institutions or academic institutions in an effort to assist people with making decisions related to social security benefits.  You may find it helpful to visit any of the following websites: maximizemysocialsecurity.com; socialsecuritysolutions.com; or socialsecuritychoices.com.  Also, AARP and T. Rowe Price have created online calculators for use in determining whether it is logical to claim benefits early or to postpone the receipt of benefits.  Some of these websites charge a fee for the service; however, some are free. 

While it may seem that simply contacting the local Social Security office and telling them that you want to claim benefits is a simple procedure, a retired person will want to make certain that they are maximizing the benefit they receive from Social Security.  My advice is to do your research before you contact the Social Security Administration to arrange for the payment of your benefits.  You may be leaving significant money on the table for you or your spouse by not making the correct choice.