Your father, the last of your parents, passed away several weeks ago. He had spent his last years in a nursing home. It wasn’t the best, but due to decent planning, it wasn’t the worst. Medicaid paid for quite a bit, and while your father’s estate is pretty drained, the family home is still there, safe and secure like always. Or is it?

Unless your father’s estate plan included a method of passing the home to you outside probate, there is a chance that Medicaid may be able to claim the home and sell it to help offset the costs of his care these last few years. What allows them to do this?

MERP

In 1993, Congress passed the Omnibus Budget Reconciliation Act, now known as OBRA ’93. As part of an effort to reduce the ever-increasing costs of healthcare (seems like that phrase will never go away!), Congress required each state that participated in Medicaid (which is all of them) to recover costs associated with the long-term care of some Medicaid recipients. The states were allowed to determine how MERP was executed, but the requirements are similar across states. In Texas, MERP is implemented by the Texas Department of Aging and Disability Services.

There are two different scenarios in which your estate may be exempt. If your loved one began receiving long-term Medicaid benefits prior to March 1, 2005, than the estate is exempt from MERP. If your loved one began receiving long-term Medicaid benefits on or after March 1, 2005, Medicaid funds may be recoverable by the state, but only for those services received when the loved one is 55 or older.

MERP in Probate

Under MERP, the state’s only tool to recover is as a claimant in probate court. A requirement of probate is that all creditors be notified of the estate’s probate, the name of the executor or administrator, and how to file a claim. This is usually a notice published in the local paper where the probate occurs. Upon notification that a Medicaid recipient has died, the state will file a claim as an unsecured creditor. Before the house can be transferred, all debts must be paid. This means that if the estate doesn’t have enough liquid assets, and none of the heirs can pay the debt in cash, the home will need to be sold.

What Can We Do?

While avoiding a MERP claim is difficult, it is not impossible. There are several exemptions, as well as some ways of defeating a claim. The exemptions typically relate to the decedent’s survivors. If the decedent is survived by a spouse, a disabled adult child, a child under 21, or an unmarried adult child who has resided in the residence for one year prior to the decedent’s death, than the state will not make a claim. If a claim is filed and one of the above statements is true, than the claim can be successfully defeated. Keep in mind that the state must follow the probate code as unsecured creditors as well. So it may be possible to bar a claim by sending a certified notice letter to the Texas Department of Aging and Disability Services. If this is done, it will shorten the amount of time the state has to make a claim on the estate to 30 days, from the standard 4 months. If they fail to make a claim within the requisite time, the claim will be barred from recovery.

The best way, however, is to plan properly. It is great that dad was able to spend his time in a decent nursing home without needing to sell his home, but if it won’t go to the people he wants it to after he dies anyhow, than what was the point of all that planning? Planned properly, you should never be in this situation in the first place.

Blended families are more and more common these days. I have 6 step-children, believe me, I know how it is. People with step-kids are often surprised when I ask them if they know what will happen to their home when they die. They say, well I don’t have a will, but I assume my wife/husband will get it. If you think this is true, you need to keep reading!

Family Law Meets Estate Planning

There are several ways to pass property after death. A will is the one most people recognize. Intestate succession, though, is the default rule in Texas. Texas Probate Code, Sec. 38 and Sec. 45 lay out the descent and distribution schema. It is fairly complex to describe and I find that a diagram is much more helpful. You can see my chart here.

So…What Happens?!

Let’s take one family as an example and follow what would happen.

Mommy Smith has never had children before. One day Mommy Smith meets a man with a beautiful daughter, they fall in love and promptly marry. They decide to buy a big beautiful home in the suburbs. They live together for several years, happy as can be. Mommy and Daddy Smith have never had a will. They aren’t rich and figured, what’s the point? I don’t have to worry about paying estate taxes, anyhow. Why bother?

One day Mommy and Daddy Smith find out wonderful news! Approximately 9 months later they have a brand new bundle of energy to play with! He is a handsome boy and everything goes swimmingly. Mommy, Daddy, daughter, and son are one big happy modern family.

Unfortunately, as is all-too-often common in my field, Dad begins to have problems. It starts out slowly, but his medical condition soon deteriorates. He passes away on a Friday afternoon in a hospital surrounded by his loving family. It happened too fast to do anything about.

The Aftermath

Dad died without a will. He was survived by a doting wife, a loving daughter, and a healthy boy. Mom realizes that, even with the life insurance, which Dad so thoughtfully took out, she just cannot afford to live in the home anymore. She needs to sell the property. Unfortunately, Daddy’s name is still on the Deed. What to do? No problem, right? The home is still hers, right?

For a traditional family, with no step-children, this would be true. Mom would simply file an application for probate (yes, even without a will) of the estate and request the Court to appoint an administrator. Without a will the administrator must follow the intestacy statutes. In a traditional family, mom would get the home, no problem. In this case, though, there is a problem.

The problem for Mommy is Texas Probate Code, Sec. 45(b). If the surviving spouse is a step-parent to one of the children, she won’t get sole title to the property. Ownership of the home would be divided into shares. Mommy Smith would take 1/2 of the home. Daughter and Son would split the other half equally. This may be especially troublesome if Daddy’s previous wife is still alive, as she would typically be in control of Daughter’s share as her conservator.

Big headache for Mommy! If Daddy had simply signed a will, even a simple, no-frills, will, she wouldn’t have to worry about any of this! She could file for probate, be appointed executor, and gain title to the home.

Don’t Let This Happen To Your Loved Ones

If you and your wife have a blended family, don’t create added stress for your loved one by not taking the time to properly plan. A simple will now may cost some money, but it will save a lot of money and headaches in the future. Contact The Tisdale Law Firm at (214) 519-8448 to schedule a consultation.

I received a question recently regarding Medicaid and “Mom’s House.” The client was 64 and had very few assets. What she did have, however, was a family home that had been in the family for quite some time. It was paid off completely and in good condition. She was on a fixed income and was having a hard time paying for the gap coverage in her Medicare.

She had heard that she may qualify for Medicaid to help cover the costs of the insurance premium, but that when she died Medicaid would take the home. She was at a loss. She really couldn’t afford the premium, but she also didn’t want the one thing she had to give to her children to be taken by Uncle Sam. She asked me, “but what to do with the house?”

Lady Bird Deeds

The real problem she had has to do with what is called The Transfer Penalty. Medicaid agencies (each state has one) want to prevent people from giving away all of their assets on day 1 and qualify for Medicaid on day 2. They do this by having a transfer penalty. The penalty takes into account how much, on a monthly basis, nursing home care is in your state. The amount transferred is divided by this number to determine the length of the penalty. Before you can qualify for Medicaid you must provide 5 years worth of documentation showing all asset transfers.

For instance, if your state’s average cost of nursing home care is $5,000 and you transfer your home, valued at $150,000, to your children before you die the penalty will be ($150,000 / $5,000) = 30 months of no coverage, from the date you qualify. That is two and a half years!

So we know that we don’t want to transfer anything within the look back period of 5 years prior to applying for Medicaid, but that’s only half the problem. The second part of the problem arises after the recipient passes away. Medicaid agencies are also required to attempt to recoup some of the cost of Medicaid benefits after the recipient passes away. The mechanism for accomplishing this is through Probate. When a Medicaid recipient dies, the executor appointed in the will typically will file an application to probate a will. When that happens they must notify all creditors. When Medicaid sees that, they will file a claim with for reimbursement from the estate.

How do you protect a home for your children from Medicaid’s recovery, while also avoiding the transfer penalty?

As the heading says, the answer in Texas is a Lady Bird Deed. A Lady Bird Deed is a revocable warranty deed with a life estate. The revocability avoids the transfer penalty because it is not REALLY a completed transfer. If a grantor has the option to unequivocally change his or her mind, then a transfer hasn’t really been made. The warranty deed with a life estate avoids the mechanism for Medicaid recovery by avoiding probate altogether. As soon as mom passes away the home will belong to the grantee(s). It will never become a part of the probate estate and therefore avoids the recovery mechanism.

My answer is a bit more simplistic than it really is. If you find yourself in this situation you really should contact an attorney in your area who is competent in this area. If your loved one is in Dallas, Denton or Collin Counties and needs a medicaid attorney, call me at (214) 519-8448.

What do you do when you think someone is hiding a deceased’s will?

You awake to a terrible phone call that your sister has just been in an accident.  You’re tired, stressed, distraught.  Thoughts are flying through your head so quickly that you can’t even think straight.

Several days later you realize that your sister’s ex-husband, the father of her two minor children, has been to the house with the kids and they said he took some papers.  You know she had a will done, but have no idea where it is.  You don’t know the attorney who wrote it. You’re beginning to lose hope that your nieces will actually receive their inheritance.

What do you do?

Get an attorney.  There are certainly some things you can do without an attorney.  Handling probate matters isn’t one of them.  Especially in a situation where you have misappropriation or outright theft.

What will he do?

More than likely the first step will be to write a Section 75 letter.  Section 75 of the Texas Probate Code says:

“On sworn written complaint that any person has the last will of any testator, or any papers belonging to the estate of a testator or intestate, the county judge shall cause said person to be cited by personal service to appear before him and show cause why he should not deliver such will to the court…”

A Section 75 letter will typically state that if the person doesn’t produce the will or documents then the party will be forced to let the Court handle the situation.

The penalty for withholding a will from the Court is usually what encourages the withholding party to give in.

“…if satisfied that such person had such will or papers at the time of filing the complaint, such judge may cause him to be arrested and imprisoned until he shall so deliver them.”

So what happens if your sister’s ex ignores the Section 75 letter? Another possibility, though more expensive, is to file for a temporary administration under Section 131A. This will allow an interested party to begin the administration of the estate without the will. This often will lead to the production of the will, if it exists.

So what does all of this mean? It means that there are options. The Probate Code has many of the answers, it only takes a good attorney to put them to good use. You have enough to worry about with the death of your loved one, leave the worrying to the attorney, that’s what he’s there for.

If you have an emergency with a probate matter contact me at (214) 519-8448 or email me at counsel@joshuatisdale.com

More and more seniors are falling prey to fraud through a vehicle that you might not suspect at first.  The durable power of attorney is a proven instrument that is extremely helpful in managing the assets of people who do not have the mental faculties that they once had.  By giving someone they trust legal permission to access bank accounts, perform financial transactions and even sell real estate, the durable power of attorney can drastically reduce the legal costs of winding down an elder relative’s financial affairs as they near the end.

Unfortunately, many elderly are finding that the sons, daughters, nieces and nephews that they thought they could trust are instead swindling them; sometimes for millions of dollars.  I personally think this is a growing concern for two reasons:

1. The previously mentioned growth in the number of people needing to use Powers-of-Attorney; and
2. The increasingly difficult financial positions the younger generations are finding themselves in.

This second point doesn’t excuse the behavior, but it certainly needs to be kept in mind when choosing who you trust your financial affairs to.  If your niece is having problems paying her bills, but your grandson is financially sound, it might be best to go to the person who doesn’t need the money.  They might not be as tempted to tap the funds that aren’t theirs.

Another side-effect of this growing fraud is that more and more financial institutions are shying away from accepting these legal instruments.  They would prefer to pay the legal bills in a court battle than to risk being a party to fraud.  To them the potential liabilities, including bad publicity, simply outweighs the costs of litigation.  It’s cheaper for the banks to ignore the power-of-attorney than to be liable for any potential fraud.

The article lists several ways to limit potential fraud, all of which I highly recommend:

1. Get it early.  I highly recommend executing a durable power-of-attorney with springing powers.  This allows a person to complete a power-of-attorney while he or she has full use of his or her faculties, but it will not take effect until a particular event or action occurs.  This is typically defined as being diagnosed by a doctor as being incapacitated.

2. Check it often.  A power-of-attorney, like any estate planning instrument, should be checked and updated often.  This isn’t just to keep me in business.  Circumstances change, finances change, the law changes.  It is also important to update a power-of-attorney because banks and other financial institutions are more likely to reject a power-of-attorney, especially if it is more than a year old.2.

3. Control the power.  The statutory durable power-of-attorney lists several specific powers and limitations.  This does not mean, however, that the power-of-attorney is limited to these alone.  It is important that you be very specific with the amount and types of powers that you are signing over.  I highly recommend allowing gifts, paying bills.  It is also possible to require double-checks on the powers, including requiring an over-seer or trustee to approve of certain transactions.  Depending on circumstances it may also be important to divide the powers between different individuals who are unlikely to collude.

One of the most important things you need to be aware of is simply to be prudent.  Be careful who you name as your attorney-in-fact, what type of powers you give them and who you have draft your power-of-attorney.

I highly recommend reading the article, which you can find here.  Should you have any questions you can always call me at (214) 519-8448 or email me at counsel@joshuatisdale.com.

529 Plans

Report cards came home yesterday. Some were great, straight A’s and all!  Some not so great..but hey, he had 8 tackles at his game today!

All joking aside, I worry about my kids’ education and I know that others do as well. Paying for college is getting more expensive every year. Even at public universities, which are essentially subsidized by the states, tuition has increased exponentially since I started—and that wasn’t all that long ago!

Worrying about your kids’ tuition can be draining, but there are a number of options out there to help prepare for that day. A great way to help fund your child or grandchild’s education is by setting up a 529 plan for them.  They are also a great tool for a comprehensive estate plan.

What is a 529 Plan?

529 plans, also known as Qualified Tuition Plans, are very simple to set up and very effective. 529 plans are tax-free savings plans to help fund education. 529 plans come in two flavors: college savings plans and prepaid tuition plans. The Texas Prepaid Higher Education Tuition Board is the state agency in charge of 529 plans in Texas. There are currently two 529 plans in Texas, the Texas Tuition Promise Fund and the Texas College Savings Plan.

529 Plans, a Flexible Solution

Unlike IRAs or other tax-advantaged accounts, 529 plans are very flexible. They not only allow the beneficiary to be changed at any time, but also allow roll-overs should the beneficiary not need or qualify for the remainder of the account. For example, if a brother has graduated from college with $7,000 left in his 529 savings plan, he can either roll-over the amount into his sister’s account or simply change the beneficiary of the account into her name.

Tax-Advantages of 529 Plans

Unlike other tax-benefit accounts like IRA’s and Coverdell Savings Accounts, 529 plans have no income ceiling for contributors. Also, 529 plans allow a one-time initial contribution equal to 5 years of the gift-tax exclusion tax-free. This is very helpful for families trying to pay-down their estates to avoid estate tax. For individuals the amount possible to transfer tax-free is $65,000, and for married-couples it is $130,000. These amounts can be used for each different 529 plan. For a couple trying to drastically reduce an estate, this is a wonderful way to do it.

The Texas Tuition Promise Fund, a 529 Prepaid Tuition Plan

Using a 529 Prepaid Tuition Plan in Texas allows you to buy credits today to use towards tuition, room and board at a specified time in the future. By paying for credits at today’s tuition rates, you can beat inflation, tax-free, and pay for your child or grandchild’s education ten or twenty years from now. There are currently three types of credits you can buy in Texas. Type I, or All Texas Colleges, is the most expensive, but also means that 100 credits will pay for 1 full year at any public school in Texas. Type II, or Texas 4 Year Colleges, is a weighted-average of all public 4 year universities in Texas. Because they use a weighted-average it is possible that 100 credits will not cover a full year on this plan. They are still a great deal, just not as good as Type I. The third type is Type III, or the Junior College Credits. This is a weighted average of all public 2 year colleges in Texas. While much cheaper than the other two, they also will only pay the weighted-average at a junior college. You must be careful in selecting which type of credit to buy.

Should the beneficiary decide on a private university or a school outside of Texas, it is possible to transfer the credits purchased through the Texas Tuition Promise Fund. The credits will be equal to the costs that the credits would pay for at a public university in Texas.

Texas College Savings Plan, a 529 Savings Plan

529 Savings Plans offer the advantage of flexibility over prepaid tuition plans. Distributions from a 529 Savings Plan may be used towards any qualified education expense. What are qualified purposes for 529 Plan distributions? Qualified education expenses can include (1) tuition and fees; (2) books, supplies, and equipment; (3) computers, equipment, internet access and related services; (4) room and board; and (5) any expenses for “special needs services.” Many of these expenses must be determined in advance by the institution that the beneficiary will attend. Room and board will only be allowed for students attending at least half-time, which is typically considered 6 semester hours, or two classes at many universities. The school will be able to tell you exactly what amount will qualify.

Overview of 529 Plans

Whether you have to worry about the annual gift-tax exclusion, or haven’t heard of it, 529 plans are a great option for anyone trying to determine how to pay for college. They are easy to set-up, easy to fund, affordable, and can save a lot of money over the life of the plan. With the ability to frontload 5 years worth of contributions they are also a viable option for depleting an estate to help avoid estate taxes without paying Generation Skipping Tax or Gift Tax.

Should you have any questions regarding 529 plans don’t hesitate to call me at (214) 519-8448 to schedule a free 20 minute consultation to discuss your options.

Conservation Easements

Due to urban encroachment, high estate taxes and the lucrative prices paid by developers, Texas is currently losing more arable land and wildlife habitat than any other state in the US. This is especially troubling given that many families in the state are selling the family farms and ranches only because they think they have no other options.

With urban encroachment comes increased land values, but this can be a two-edged sword.  If you consider your family farm as simply a financial asset to be sold when prices are high, then this is great.  If, however, you are like many families who view the family farm as a real estate heirloom to be protected, then those high land values can be devastating.  Many families are selling out because they simply cannot afford the property taxes and estate taxes that come with the high land values.

Even with a comprehensive estate plan, many of these farms and ranches simply cannot get around the burdens that come with high land values combined with a relatively low production value.  These are exactly the type of properties that conservation easements were created for.

What are they?

Conservation easements in Texas are guided by chapter 183 of the Texas Natural Resources Code and by Sec. 2031(c) of the Internal Revenue Code.  A conservation easement gives a holder, usually a non-profit land trust, a non-possessory interest in the land that places certain restrictions on it.  As every property is different, these conveyances are highly specific and individually tailored.   These restrictions can be written to protect the land’s natural resources and beauty; protect and enhance the overall quality of the environment; and to preserve any cultural heritage that may be present on the property.  They can also allow a family farm to continue functioning, including growing crops and building a house.

Because the future development of the land is restricted the value of the property will decline, which will help lower the property taxes on the land.  The IRS also allows the conveyance to be made by the executor of the estate.  This is very attractive for large family farms and ranches, as the conveyance allows the executor to reduce the amount of the estate by 40% of the value of the farm, sometimes saving tens of thousands of dollars in estate tax.

What’s the catch?

The catch is a big one, the transfer must be in perpetuity.  This means that in order to be used for estate tax purposes the development rights of the farm or ranch will forever be restricted.  For some this can be a deal breaker, it depends on how the property is viewed by the family.

Does that mean you can never sell the property?  No.  You can sell the property just as you normally would.  The buyer will still be restricted from developing the property, but they can enjoy the use of it as a farm, ranch or simply as open land.

Want to know more?

Conservation easements are not for everyone.  If you want to know more, there are several links on my resources page which you might find useful—just look under the Estate Planning Section.

And as always you can call me to set up a free consultation at (214) 519-8448.