Disability Considerations
There are more files in probate court which deal with incapacity than those that deal with death. If an individual is incompetent, a court proceeding will be required to authorize someone else to sign documents and handle financial affairs on that person's behalf - unless preplanning is done to authorize someone to step in at that time without court intervention. Without authorization in documents or from a court, no one is authorized to access accounts. Institutions may freeze funds since they may be subject to liability if funds are released to someone other than the person who is legally authorized to withdraw them.
The purpose of conservatorship proceedings is to protect the interest of the incompetent person (the ward). In order to carry out this mission, formal, detailed accounting of assets, income and liabilities is required to be filed with the court on a periodic basis. Initial proceedings generally require an attorney to be appointed as a guardian ad litem for the purpose of making sure that the interests of the ward are being protected. This requirement exists even if the proposed conservator is the ward's spouse or child. The conservator must file an annual report of all expenses and income of any type which affects the ward.
In some circumstances, the requirement of accountings and appointment of attorneys to protect the ward may be necessary as protection against overreaching by an untrustworthy, greedy, or inept conservator. However, these requirements apply to all proceedings when incompetency is involved, since the court cannot differentiate between those needing protection and those who do not. Many individuals choose to avoid court protection. Documents to avoid court proceedings must be executed prior to incompetency. If documents aren't completed to 'opt out' of court protection in the event of incompetency, court proceedings and requirements will be compulsory to authorize action on behalf of the ward.
Two primary types of documents are used to authorize a person to act on behalf of another if incompetency occurs. One is the durable power of attorney. The other is a management provision incorporated into the terms of a living trust.
DURABLE POWER OF ATTORNEY
A power of attorney allows another person (the attorney-in-fact or agent) to act in place of the principal (the person signing and authorizing the power of attorney). The power of attorney may be drafted so that it only becomes effective upon the disability or incapacity of the principal, or alternatively, may be drafted so that it is effective immediately. Powers of attorney which only become effective upon incapacity may create issues in determining when incapacity occurs. On the other hand, a power of attorney which becomes effective immediately upon signing is a powerful document, and should be signed only if absolute trust exists between the principal and the agent.
A power of attorney may be broad or very specific, granting only limited powers. Limited powers of attorney are more frequently used during a vacation or for a particular project (e.g. - sale of real estate when the seller is out of town) than to deal with capacity. In order to avoid conservatorship proceedings upon incompetency, a general power of attorney which gives broad powers is necessary, since someone must be authorized to take care of all day-to-day financial affairs. If the power of attorney does not authorize someone to handle all financial affairs, court proceedings are necessary to give someone the power to handle daily financial responsibilities.
Unless a power of attorney is durable it will terminate upon the disability of the principal. In order to be 'durable', the document must specifically state that it will remain effective after the disability of the principal.
In naming an agent, it is usually wise to list an alternate. For example, if the spouse is named as primary, a responsible child or other trusted person may be named as alternate. That way, if the primary appointee is not available, an agent is still authorized and court proceedings are still avoided. Some people prefer to name more than one person to act as co-agents. In this way, no one person has full control, so a checks-and-balances system exists. Keep in mind that all co-agents must sign all necessary documents, so naming more than two people to act jointly, particularly if they are in different geographic areas, may be logistically cumbersome.
USE OF A LIVING TRUST TO AVOID COURT PROCEEDINGS UPON INCAPACITY
In addition to avoiding probate of assets upon death, provisions of a living trust may eliminate court proceedings if the person who put assets into the living trust becomes incompetent. The person, or people, who put assets into the trust (the grantors) generally act as their own trustees (managers) for as long as they are able. If a primary trustee becomes incompetent and no other primary trustee is available to take over management, then the named successor trustee(s) may take over management of the trust according to the terms of the trust agreement.
A typical trust provision requires that two doctors sign affidavits stating that the primary trustee-grantor is incompetent to act. Copies of the physicians' statements must then be given to the person who is allegedly incompetent. If the alleged incompetent gives written notice to the successor trustee who obtained the doctors' certificates that s/he disagrees with the doctors, then the original trustee-grantor remains in control of trust assets unless removed by a court. If the original trustee-grantor does not give notice of disagreement (which is typically the case if incompetency does indeed exist), the successor trustee then presents copies of the doctors' affidavits to institutions or individuals holding assets. These documents, in conjunction with the provisions in the trust agreement, give the successor trustee the authority to take over management of trust assets.
A living trust may be drafted to include any requirements which are acceptable to the grantor of the trust to transfer control if an incompetency occurs. The doctors' affidavits and a requirement of service of affidavits on the alleged incompetent provide a good balance between requiring court proceedings and making it too easy for a successor trustee to take over management.
COORDINATION OF POWER OF ATTORNEY AND LIVING TRUST
Even when incompetency provisions are included in a living trust, a durable power of attorney should be coordinated with the trust. If possible, the same person or institution should be named to fill both the position of successor trustee in the living trust and the position of agent under the durable power of attorney. If appointments under various documents are identical, potential difficulty with determining which document controls a particular action or asset is eliminated. If one person is named as agent under the durable power of attorney and a different person is named as successor trustee, the job duties may overlap and issues may result.
The power of attorney is used to supplement the trust document in two ways. First, the durable power of attorney gives the agent the authority to handle non-trust assets, such as checks written to the individual. Since the trust agreement covers only trust assets, it cannot authorize the successor trustee to control non-trust assets. Additionally, the durable power of attorney may authorize the agent to transfer assets into the trust which have not yet been put into the living trust. This provision allows the agent to avoid probate on assets which had not previously been transferred to the trust.
The power of attorney ends upon the death of the principal, whereas the authority of the successor trustee continues after the death of the grantor of the living trust.
DURABLE POWER OF ATTORNEY FOR HEALTH CARE
Durable powers of attorney for health care contain directions regarding prolonging life by artificial means if the condition is terminal. These documents provide family members or others appointed by the document with authority to make medical decisions on the principal's behalf if the principal is unable to do so.
The power of attorney for health care may also authorize the agent to admit the principal to a nursing home if s/he is unable to sign documents for self-admission. While most of us would like to avoid admission to a nursing home, failure to sign this document does not protect us from that potential necessity. If circumstances arise that require a short or long term nursing home stay, a signed power of attorney for health care will eliminate the need to go through a court proceeding to authorize someone to make those decisions and sign required paperwork. It is important to use standard documents approved in your jurisdiction. Health care providers in your jurisdiction will be familiar with those documents and will feel comfortable that they are protected from liability when they rely on the documents
HIPAA AUTHORIZATION FORM
The health insurance portability and accountability act (HIPAA) requires a signed document to authorize release of medical information to another person. Signing a HIPAA form as part of your overall estate plan prevents issues family members or others may encounter in obtaining medical information. The document authorizes specific named individuals to access information.
MEDICAID CONSIDERATIONS
A frequent question as part of estate planning is "How do I protect my assets from being depleted if I need nursing home care?" Long term care can be very costly and rules impacting this area have changed significantly over the years, so this is a very legitimate question.
Questions regarding preservation of assets when nursing home care is needed are actually questions related to Medicaid planning. Medicaid is the government program that covers most nursing home and other medical costs for those who qualify. Eligibility standards change frequently and vary from jurisdiction to jurisdiction.
Medicaid is a needs based program, so in order to qualify, an applicant's income and assets must be under specific levels. Wisconsin Medicaid allows retention of $2,000 in liquid assets for an individual and $3,000 if both spouses are applying. In some circumstances the applicants may retain a car, some life insurance, personal property and other assets and still qualify.
In 2023, gift tax provisions allow for transfer of up to $17,000 per person per year with no paperwork or tax impact, (See Lifetime Gifting for more information). However, this $17,000 has no impact on Medicaid law. Any transfers made where less than fair market value is paid will be considered a gift for purposes of Medicaid eligibility. This process is referred to as divestiture.
Gifts made 60 months prior to application for Medicaid will be reviewed and may make the applicant ineligible. Periods of ineligibility will depend an amounts transferred. At one time, waiting periods following divestment began to run on the date the gift was made. Currently, any waiting periods triggered by gifts made will not begin to run until the date the Medicaid application is submitted. This rule change makes it very difficult to give assets away and then become eligible for Medicaid.
The strict and ever-changing rules make divestment dangerous for the individual, and potentially costly overall. Here are a few of the pitfalls of transferring assets in an effort to protect them:
• Transfer of assets will likely compromise eligibility for Medicaid, but the transfers are still completed gifts. This means that if the donee is not willing to return the gifted assets, or is unable to because they have been spent or lost in some way, an individual may find themselves with no funds with which to pay for care, but unable to qualify for programs.
• When assets are gifted, the original cost basis of the gift follows the asset. If the gifted asset has increased in value since it was acquired, if beneficiaries inherit that asset, all capital gain to date of death is forgiven upon inheritance. If the same asset is gifted during lifetime, the capital gain is NOT forgiven, and when the asset is eventually sold, tax will be due on the gain. When appreciated assets are under consideration for gifting, the tax savings of retaining the assets so they're inherited and capital gains is forgiven may be enough to simply retain the asset and purchase long term care insurance instead.
• If all goes right and Medicaid eligibility is actually attained, there is no guarantee that providers will be available who will be willing to serve Medicaid recipients. Under the Affordable Care Act, i.e.-ObamaCare, future reimbursement rates are unclear and administrative requirements are causing providers to simply choose not to serve Medicaid patients. With rising government debt and increasing demand for medical and nursing home services as baby boomers age and more people qualify for benefits under ObamaCare, we face a significant risk that even if Medicaid eligibility is achieved, quality services simply may not be available.
• The negatives of relinquishing control of assets should not be underestimated. Independence, self-esteem and life choices can be severely compromised. We all love our children, but few of us envisioned needing to ask them for money, even if it is money we gave to them.
With the degree of money printing by the Federal Reserve and continued government spending, it's impossible to predict what the cost of living or the rate of inflation could be throughout our lifetimes. While it may be tempting to gift assets to qualify for Medicaid, it does little good if the need for nursing home care is not imminent due to the waiting periods involved. If nursing home care is not imminent, transferring enough to make a difference in eventual eligibility may negatively impact your retirement years when you're healthy and should be able to enjoy the security of retaining your assets.
WHAT PLANNING CAN BE DONE?
• Spousal Impoverishment rules allow the 'community spouse' - the one not needing nursing home or other institutional care - to retain certain assets and a base level of income without impacting the other spouse's Medicaid eligibility . These rules protect one spouse from being pauperized because of the other spouse's need for care. Assets and income should be reviewed to maximize protection for the community spouse while maintaining Medicaid eligibility for the other spouse. Upon the community spouse's death, the state retains the right to make claims against the estate of the community spouse for reimbursement
• Long term care insurance may be purchased to cover all or part of the cost of care, and may be purchased for unlimited periods of time or for a specific number of months. The most advisable option depends on the type and level of assets as well as personal health, family and goals.
• If care is being provided by a family member, an employment agreement may be entered into to pay a reasonable fee for that care. The recipient of that pay must report the income on their income tax return since it is earned income. Actual services must be provided. In this way, care may be given by a family member, money is retained within the family, and funds are being reduced without triggering waiting periods if a Medicaid application is filed in the future.
• If nursing home care is imminent, prior to making application, it is important to review assets and to 'spend down' to expedite eligibility. There are no waiting periods on eligibility after spending funds on exempt assets such as allowed levels of pre-paid burial plans, burial plots, caskets and vaults, allowable life insurance, personal property and other exempt items.
The purpose of conservatorship proceedings is to protect the interest of the incompetent person (the ward). In order to carry out this mission, formal, detailed accounting of assets, income and liabilities is required to be filed with the court on a periodic basis. Initial proceedings generally require an attorney to be appointed as a guardian ad litem for the purpose of making sure that the interests of the ward are being protected. This requirement exists even if the proposed conservator is the ward's spouse or child. The conservator must file an annual report of all expenses and income of any type which affects the ward.
In some circumstances, the requirement of accountings and appointment of attorneys to protect the ward may be necessary as protection against overreaching by an untrustworthy, greedy, or inept conservator. However, these requirements apply to all proceedings when incompetency is involved, since the court cannot differentiate between those needing protection and those who do not. Many individuals choose to avoid court protection. Documents to avoid court proceedings must be executed prior to incompetency. If documents aren't completed to 'opt out' of court protection in the event of incompetency, court proceedings and requirements will be compulsory to authorize action on behalf of the ward.
Two primary types of documents are used to authorize a person to act on behalf of another if incompetency occurs. One is the durable power of attorney. The other is a management provision incorporated into the terms of a living trust.
DURABLE POWER OF ATTORNEY
A power of attorney allows another person (the attorney-in-fact or agent) to act in place of the principal (the person signing and authorizing the power of attorney). The power of attorney may be drafted so that it only becomes effective upon the disability or incapacity of the principal, or alternatively, may be drafted so that it is effective immediately. Powers of attorney which only become effective upon incapacity may create issues in determining when incapacity occurs. On the other hand, a power of attorney which becomes effective immediately upon signing is a powerful document, and should be signed only if absolute trust exists between the principal and the agent.
A power of attorney may be broad or very specific, granting only limited powers. Limited powers of attorney are more frequently used during a vacation or for a particular project (e.g. - sale of real estate when the seller is out of town) than to deal with capacity. In order to avoid conservatorship proceedings upon incompetency, a general power of attorney which gives broad powers is necessary, since someone must be authorized to take care of all day-to-day financial affairs. If the power of attorney does not authorize someone to handle all financial affairs, court proceedings are necessary to give someone the power to handle daily financial responsibilities.
Unless a power of attorney is durable it will terminate upon the disability of the principal. In order to be 'durable', the document must specifically state that it will remain effective after the disability of the principal.
In naming an agent, it is usually wise to list an alternate. For example, if the spouse is named as primary, a responsible child or other trusted person may be named as alternate. That way, if the primary appointee is not available, an agent is still authorized and court proceedings are still avoided. Some people prefer to name more than one person to act as co-agents. In this way, no one person has full control, so a checks-and-balances system exists. Keep in mind that all co-agents must sign all necessary documents, so naming more than two people to act jointly, particularly if they are in different geographic areas, may be logistically cumbersome.
USE OF A LIVING TRUST TO AVOID COURT PROCEEDINGS UPON INCAPACITY
In addition to avoiding probate of assets upon death, provisions of a living trust may eliminate court proceedings if the person who put assets into the living trust becomes incompetent. The person, or people, who put assets into the trust (the grantors) generally act as their own trustees (managers) for as long as they are able. If a primary trustee becomes incompetent and no other primary trustee is available to take over management, then the named successor trustee(s) may take over management of the trust according to the terms of the trust agreement.
A typical trust provision requires that two doctors sign affidavits stating that the primary trustee-grantor is incompetent to act. Copies of the physicians' statements must then be given to the person who is allegedly incompetent. If the alleged incompetent gives written notice to the successor trustee who obtained the doctors' certificates that s/he disagrees with the doctors, then the original trustee-grantor remains in control of trust assets unless removed by a court. If the original trustee-grantor does not give notice of disagreement (which is typically the case if incompetency does indeed exist), the successor trustee then presents copies of the doctors' affidavits to institutions or individuals holding assets. These documents, in conjunction with the provisions in the trust agreement, give the successor trustee the authority to take over management of trust assets.
A living trust may be drafted to include any requirements which are acceptable to the grantor of the trust to transfer control if an incompetency occurs. The doctors' affidavits and a requirement of service of affidavits on the alleged incompetent provide a good balance between requiring court proceedings and making it too easy for a successor trustee to take over management.
COORDINATION OF POWER OF ATTORNEY AND LIVING TRUST
Even when incompetency provisions are included in a living trust, a durable power of attorney should be coordinated with the trust. If possible, the same person or institution should be named to fill both the position of successor trustee in the living trust and the position of agent under the durable power of attorney. If appointments under various documents are identical, potential difficulty with determining which document controls a particular action or asset is eliminated. If one person is named as agent under the durable power of attorney and a different person is named as successor trustee, the job duties may overlap and issues may result.
The power of attorney is used to supplement the trust document in two ways. First, the durable power of attorney gives the agent the authority to handle non-trust assets, such as checks written to the individual. Since the trust agreement covers only trust assets, it cannot authorize the successor trustee to control non-trust assets. Additionally, the durable power of attorney may authorize the agent to transfer assets into the trust which have not yet been put into the living trust. This provision allows the agent to avoid probate on assets which had not previously been transferred to the trust.
The power of attorney ends upon the death of the principal, whereas the authority of the successor trustee continues after the death of the grantor of the living trust.
DURABLE POWER OF ATTORNEY FOR HEALTH CARE
Durable powers of attorney for health care contain directions regarding prolonging life by artificial means if the condition is terminal. These documents provide family members or others appointed by the document with authority to make medical decisions on the principal's behalf if the principal is unable to do so.
The power of attorney for health care may also authorize the agent to admit the principal to a nursing home if s/he is unable to sign documents for self-admission. While most of us would like to avoid admission to a nursing home, failure to sign this document does not protect us from that potential necessity. If circumstances arise that require a short or long term nursing home stay, a signed power of attorney for health care will eliminate the need to go through a court proceeding to authorize someone to make those decisions and sign required paperwork. It is important to use standard documents approved in your jurisdiction. Health care providers in your jurisdiction will be familiar with those documents and will feel comfortable that they are protected from liability when they rely on the documents
HIPAA AUTHORIZATION FORM
The health insurance portability and accountability act (HIPAA) requires a signed document to authorize release of medical information to another person. Signing a HIPAA form as part of your overall estate plan prevents issues family members or others may encounter in obtaining medical information. The document authorizes specific named individuals to access information.
MEDICAID CONSIDERATIONS
A frequent question as part of estate planning is "How do I protect my assets from being depleted if I need nursing home care?" Long term care can be very costly and rules impacting this area have changed significantly over the years, so this is a very legitimate question.
Questions regarding preservation of assets when nursing home care is needed are actually questions related to Medicaid planning. Medicaid is the government program that covers most nursing home and other medical costs for those who qualify. Eligibility standards change frequently and vary from jurisdiction to jurisdiction.
Medicaid is a needs based program, so in order to qualify, an applicant's income and assets must be under specific levels. Wisconsin Medicaid allows retention of $2,000 in liquid assets for an individual and $3,000 if both spouses are applying. In some circumstances the applicants may retain a car, some life insurance, personal property and other assets and still qualify.
In 2023, gift tax provisions allow for transfer of up to $17,000 per person per year with no paperwork or tax impact, (See Lifetime Gifting for more information). However, this $17,000 has no impact on Medicaid law. Any transfers made where less than fair market value is paid will be considered a gift for purposes of Medicaid eligibility. This process is referred to as divestiture.
Gifts made 60 months prior to application for Medicaid will be reviewed and may make the applicant ineligible. Periods of ineligibility will depend an amounts transferred. At one time, waiting periods following divestment began to run on the date the gift was made. Currently, any waiting periods triggered by gifts made will not begin to run until the date the Medicaid application is submitted. This rule change makes it very difficult to give assets away and then become eligible for Medicaid.
The strict and ever-changing rules make divestment dangerous for the individual, and potentially costly overall. Here are a few of the pitfalls of transferring assets in an effort to protect them:
• Transfer of assets will likely compromise eligibility for Medicaid, but the transfers are still completed gifts. This means that if the donee is not willing to return the gifted assets, or is unable to because they have been spent or lost in some way, an individual may find themselves with no funds with which to pay for care, but unable to qualify for programs.
• When assets are gifted, the original cost basis of the gift follows the asset. If the gifted asset has increased in value since it was acquired, if beneficiaries inherit that asset, all capital gain to date of death is forgiven upon inheritance. If the same asset is gifted during lifetime, the capital gain is NOT forgiven, and when the asset is eventually sold, tax will be due on the gain. When appreciated assets are under consideration for gifting, the tax savings of retaining the assets so they're inherited and capital gains is forgiven may be enough to simply retain the asset and purchase long term care insurance instead.
• If all goes right and Medicaid eligibility is actually attained, there is no guarantee that providers will be available who will be willing to serve Medicaid recipients. Under the Affordable Care Act, i.e.-ObamaCare, future reimbursement rates are unclear and administrative requirements are causing providers to simply choose not to serve Medicaid patients. With rising government debt and increasing demand for medical and nursing home services as baby boomers age and more people qualify for benefits under ObamaCare, we face a significant risk that even if Medicaid eligibility is achieved, quality services simply may not be available.
• The negatives of relinquishing control of assets should not be underestimated. Independence, self-esteem and life choices can be severely compromised. We all love our children, but few of us envisioned needing to ask them for money, even if it is money we gave to them.
With the degree of money printing by the Federal Reserve and continued government spending, it's impossible to predict what the cost of living or the rate of inflation could be throughout our lifetimes. While it may be tempting to gift assets to qualify for Medicaid, it does little good if the need for nursing home care is not imminent due to the waiting periods involved. If nursing home care is not imminent, transferring enough to make a difference in eventual eligibility may negatively impact your retirement years when you're healthy and should be able to enjoy the security of retaining your assets.
WHAT PLANNING CAN BE DONE?
• Spousal Impoverishment rules allow the 'community spouse' - the one not needing nursing home or other institutional care - to retain certain assets and a base level of income without impacting the other spouse's Medicaid eligibility . These rules protect one spouse from being pauperized because of the other spouse's need for care. Assets and income should be reviewed to maximize protection for the community spouse while maintaining Medicaid eligibility for the other spouse. Upon the community spouse's death, the state retains the right to make claims against the estate of the community spouse for reimbursement
• Long term care insurance may be purchased to cover all or part of the cost of care, and may be purchased for unlimited periods of time or for a specific number of months. The most advisable option depends on the type and level of assets as well as personal health, family and goals.
• If care is being provided by a family member, an employment agreement may be entered into to pay a reasonable fee for that care. The recipient of that pay must report the income on their income tax return since it is earned income. Actual services must be provided. In this way, care may be given by a family member, money is retained within the family, and funds are being reduced without triggering waiting periods if a Medicaid application is filed in the future.
• If nursing home care is imminent, prior to making application, it is important to review assets and to 'spend down' to expedite eligibility. There are no waiting periods on eligibility after spending funds on exempt assets such as allowed levels of pre-paid burial plans, burial plots, caskets and vaults, allowable life insurance, personal property and other exempt items.