Quarterly Newsletters

March 2012: The Well-Drafted Power of Attorney

I believe that anyone over the age of eighteen should have a financial power of attorney document. A power of attorney is a document that allows one person, called the "agent," to make financial decisions for another person, called the "principal."

I say that anyone over the age of eighteen should have a power of attorney because eighteen in the age of legal majority. When a person attains the age of eighteen, his parents can no longer make financial decisions for him.

Being married doesn't eliminate the need for a power of attorney either. Many married individuals believe that if they ever became disabled, their spouse would be able to make decisions for them. This is untrue. A spouse is no more capable of making financial decisions for you than is your neighbor.

Many married individuals also believe that a power of attorney is unnecessary because the assets he owns are owned jointly with his spouse. Since the assets are owned jointly, so the theory goes, the non-disabled spouse will be able to access the assets for her benefit if her husband were to become disabled.

The problem with this theory is, it is untrue, as well. While many assets may be jointly owned, some, inevitably, are not. For instance, 401(k) plans and IRAs are never jointly owned. Furthermore, even jointly owned assets are not always accessible by either person. The marital home may be jointly owned, but neither spouse could do anything with the home unless the other spouse consents. And consent requires mental capacity.

With a power of attorney, the agent is capable of making all decisions for the principal, assuming that the power of attorney is well-drafted. The "well-drafted" point is something I have reiterated in numerous articles that I have written, and it's something that I want to reiterate again.

You can go to an office superstore and purchase a power of attorney for $10, but it's probably worth $10. When your agent needs to use that $10 power of attorney that you drafted, he may find out that he cannot perform certain financial actions for you because those financial actions are not addressed in the power of attorney document. An agent can only do for you what you have specifically granted him authority to do.

Another important issue that many powers of attorney overlook, and most assuredly the $10 power of attorney will overlook, is compensation of your agent. I cannot tell you how much work is involved in being a disabled person's power of attorney agent.

For instance, I have helped many hundreds of people apply for Medicaid benefits. Applying for Medicaid is hard work. I recently read an article about applying for a mortgage and how much work applying for a mortgage is. Many people, according to this article, are turned off by the entire mortgage process because of the amount of work that is involved.

Well, I've refinanced my house recently, and I can tell you that obtaining a mortgage is far more work nowadays than it was in the past. I can also tell you that the amount of effort it takes to obtain a mortgage is about half the effort it takes to obtain Medicaid benefits.

So, imagine having to put that much time and effort into a process for someone else and not even receive compensation for your work. While many people do the work because it is for someone they love, it would be nice and appropriate if the agent received compensation for the work he had to perform.

Unless the power of attorney specifically says the agent can be compensated, he cannot be compensated unless he obtains a court order for the compensation. So a well-drafted power of attorney would address the right of the agent to receive compensation for the work he performs on behalf of the principal.

Take my advice, consult with an elder law attorney and have your power of attorney and other estate planning documents drafted. While it may cost more than $10, it won't cost that much more.

SOMETIMES LESS IS MORE

A large part of my practice is helping clients apply for Medicaid. I've probably filed three hundred or more Medicaid applications on behalf of clients.

Medicaid is a health insurance program for needy individuals. Unlike most insurance programs, Medicaid pays for the costs of long-term care, such as care in a nursing home. In order to qualify for Medicaid, an individual must have income that is insufficient to pay for the cost of his care, and he must have very limited assets, typically less than $2,000.

One of the concepts that I attempt to convince my client of is, when it comes to Medicaid, having less money is better. Since Medicaid is only available to people who have very limited assets, having too many assets would mean that the person does not qualify for benefits. So, for instance, if the applicant for Medicaid has $5,000 in a checking account, he isn't going to qualify for Medicaid, yet he doesn't have enough money to pay the nursing home, which probably costs $10,000 a month.

An applicant's assets must be below the asset limit, that is, $2,000, as of the first moment of the first day of a month. In other words, the applicant's assets must be equal to or less than $2,000 as of one second past midnight on the first day of the month.

If the applicant's assets are over the limit as of the first moment of the first day of the month, the applicant is ineligible for the entire month. He could only potentially qualify for benefits the next month, assuming that his assets are below the asset limit as of the first moment of the first day of that month.

The balance of an applicant's bank accounts as of the first moment of the first day of a month is obtained by backing out any checks that the applicant has written but have not been cashed. In other words, if the applicant wrote checks to pay his bills but the creditor did not cash those checks, the un-cashed checks reduce the balance in the applicant's bank accounts.

For this reason, I instruct all of my clients to pay any and all bills. I also tell the client to write the checks without waiting for the bills to come. Despite this, I cannot tell you how many clients have said to me, after I ask them why their account balances are so high, "I was waiting for the bill to come."

Waiting for the bill to come could result in your waiting for more bills to come, only you won't have the money to pay these bills. If you know that you owe a doctor or the nursing home or the tax bill, why not pay that bill? If you don't know the exact amount, estimate as best you can. When it comes to Medicaid, less is more and ensuring that you have less as quickly as possible is also very important. The sooner you qualify for benefits, the sooner the nursing home will stop billing you and start billing Medicaid.

I also think that people find it difficult to spend their assets down to practically zero. Like basic survival, I think people just have this innate desire to retain some money.

But, as stated, when it comes to Medicaid, less is more. Having $4,362 isn't much more than $1,000, but having $4,362 means that you are ineligible for Medicaid. Having $4,362 means that the nursing home will be sending you a bill for $10,000.

And what if the nursing home doesn't get paid? You might think, Well, I have no money now. What is the nursing home going to do?

In many cases, what the nursing home is going to do, rightly or wrongly, is sue a family member of yours who probably signed the admission paperwork when you first entered the nursing home. Take my advice, when it comes to Medicaid, less is more.

ACCOUNTING FOR WHAT YOU DID

One of the biggest responsibilities that any executor or trustee has is to account to the beneficiaries of the estate or the trust. Executors and Trustees are fiduciaries, meaning that they owe the utmost duty of care to the beneficiaries of the estate or trust. A fiduciary must invest the assets prudently and must distribute the assets according to the terms of the last will and testament or trust.

A fiduciary's accounting must follow a certain format. That format provides the beneficiaries with a detailed understanding of how the fiduciary has handled the assets of the estate.

In return for his accounting, the fiduciary requests that the beneficiaries of the estate sign a release. The release, as the name implies, releases the executor from any liability he may have for mishandling the affairs of the estate.

For this reason, the accounting is one of the most important tasks that a fiduciary performs, because the role of a fiduciary is chock full of liability. All fiduciaries should insist upon being release from liability. Otherwise, the fiduciary remains subject to lawsuits.

So, what does an accounting entail? Through an accounting, the executor informs the beneficiaries what assets came into his hands. For instance, if Mrs. Smith dies owning a home, a car, five bank accounts, and a brokerage account, all of those assets go on the accounting providing date of death values for each of those assets.

But not all assets that Mrs. Smith owned go on her executor's accounting. If Mrs. Smith's brokerage account named a beneficiary, for instance, the brokerage account would not be listed on the accounting, because the brokerage account would pass outside the control of the executor according to the beneficiary designation. The same would be true if Mrs. Smith owned a life insurance policy that named a beneficiary.

Furthermore, if one of Mrs. Smith's bank accounts were jointly owned with another individual, the bank account would pass to the surviving account holder upon Mrs. Smith's death. As with the accounts that have beneficiary designations, a jointly-held bank account passes outside the control of the executor.

Passing outside the control of the executor is not a good thing by the way. It doesn't, for instance, mean that the assets aren't subject to death tax. It just means that the executor lacks control of the assets, which could be a bad thing.

Another major aspect of the accounting is what debts the executor paid. When he paid the debt, from what account he paid the debts, and what the nature of the debt was.

The accounting must also show what income the assets of the estate have earned. For instance, did the bank accounts earn interest income, and if so, how much.

The accounting must show what changes have occurred in the assets of the estate. For instance, Mrs. Smith's brokerage account may have gone up or down in value. That gain or loss in value must be reflected on the accounting.

Furthermore, if a bank account were closed and the proceeds were transferred to another account, the accounting should reflect that fact. Perhaps the executor closed four of the five bank accounts and moved those accounts to an estate account.

Finally, the accounting should show the current nature of the estate's assets.

In return for faithfully carrying out his duties and providing a comprehensive accounting, the beneficiaries should release the executor from his duties. If a beneficiary refuses to sign the accounting, then the executor will have to file his accounting "formally," which means he files it with the court. The court will then review the accounting and pass final judgment on it.

MEDICAID GETS A BIT MORE GENEROUS

For a married couple, Medicaid can be a rather generous program, and this year, it just became a bit more generous. Medicaid is a health insurance program for needy individuals. Unlike most health insurance programs, Medicaid pays for long-term care, such as care in a nursing home.

When dealing with a couple, the spouse who is living at home is called the "community spouse." The spouse living in the nursing home is called the "institutionalized spouse."

When the institutionalized spouse applies for Medicaid, the Medicaid Office looks at the couple's assets. The Medicaid Offices breaks their assets down into "countable assets" and "non-countable assets."

Non-countable assets include the home in which the community spouse resides, one car, personal effects and household goods, and small policies of life insurance. With limited, other exceptions, most other assets are countable assets.

So, countable assets include bank accounts, stocks, bonds, mutual funds, annuities, real estate other than the home, IRAs, and 401(k)s. All of these assets are considered countable because these assets count against the eligibility of the institutionalized spouse.

The assets of the couple are pooled for purposes of determining the institutionalized spouse's eligibility. This means that whichever spouse owns the countable asset, the asset counts against the eligibility of the institutionalized spouse. The community spouse could own and could have always owned all the assets. That fact is irrelevant. As far as Medicaid is concerned, the institutionalized spouse owns those assets, too.

The institutionalized spouse is entitled to retain no more than $2,000 in countable assets. Since the assets of the community spouse and institutionalized spouse are pooled, this fact would mean that the community spouse were only entitled to retain the same $2,000 if the Medicaid laws failed to provide a safeguard for her.

Fortunately for community spouse's, the Medicaid Act does contain a safeguard. That safeguard is called the "community spouse resource allowance" or CSRA. The CSRA is an established amount of countable assets that the community spouse is entitled to retain. The CSRA is indexed for inflation, so it frequently increases every January.

This January, the CSRA did increase. The maximum CSRA, meaning the most countable assets that the community spouse can retain, is $113,640. The minimum CSRA, meaning the least dollar amount of countable assets that the community spouse can retain, is $22,728.

So, how does the CSRA calculation work? Assume that Mr. Smith enters a nursing home. Mr. and Mrs. Smith own a home, a car, and $300,000 in cash. Mrs. Smith can retain the home, the car, and $113,640 in cash, which is the maximum CSRA.

If the couple owned $200,000 in cash, Mrs. Smith could retain $100,000 in cash. If the couple owned $100,000 in cash, Mrs. Smith could retain $50,000. If they had $50,000, Mrs. Smith could retain $25,000, and if they had $25,000, Mrs. Smith could retain the minimum CSRA, or $22,728.

Mrs. Smith can always retain the home and a car, but she also gets to retain the CSRA. Because Mrs. Smith can retain the home, which is typically a couple's most valuable asset, and some cash, I say that Medicaid is rather generous for a couple.

Of course, Mrs. Smith may not feel too comfortable only be able to retain $50,000 or even $100,000 in cash, and rightfully so. But there are Medicaid planning techniques that can be used to help Mrs. Smith retain additional assets or income so she can pay her bills.

FEDERAL AGENCY SUPPORTS MEDICAID TECHNIQUE

A common technique to obtain eligibility for Medicaid benefits just received a strong vote of approval from the federal agency charged with administering the Medicaid program. The Centers for Medicare and Medicaid Services (commonly referred to as "CMS") administers the Medicaid program. In a pending federal case, CMS submitted a legal brief that wholly endorses the purchase of certain, properly-structured annuities to generate income for the non-ill spouse.

Individuals frequently consult with me when a family member has entered a nursing home, and they are told that the nursing home will cost $10,000 a month. For instance, a wife will consult with me because her husband just entered a nursing home. At $120,000 a year, the wife worries that she will be impoverished if she has to continue to pay for her husband's care.

Most of the elderly wives whom I see have less fixed monthly income than their husbands. The wife might receive a monthly Social Security check of $800 while the husband might receive a Social Security check of $1,800 and a pension check of $2,500. The wife worries that she will be unable to live if she has to spend most of the couple's assets before her husband qualifies for Medicaid benefits.

Let's assume that the couple owns a house, a car, and cash of approximately $200,000. The basic rules governing Medicaid eligibility permit the wife to retain the house, the car, and $100,000 of the $200,000 in cash. The wife must "spend down" the other $100,000 in cash before the husband will qualify for Medicaid.

In 2006, the laws governing the Medicaid program were changed. In part, the changes addressed the purchase of annuities. An annuity is an investment product that is typically sold by an insurance company. An annuity pays back the owner the principal she invested plus interest over a fixed period of time.

The 2006 change to the Medicaid Act addresses whether or not the purchase of an annuity is an uncompensated transfer of an asset. Uncompensated transfers result in periods of ineligibility for Medicaid benefits. If the wife's purchase of an annuity meets the criteria outlined in the Medicaid Act, her purchase of the annuity will not be treated as an uncompensated transfer and will not result in a period of ineligibility for Medicaid.

But not being an uncompensated transfer is only half the battle. The State, which does not like to award Medicaid benefits to any individual it determines to be undeserving of such benefits, has claimed for years that an annuity is an asset that has value, so if the wife purchases an annuity for $100,000, according to the State, her husband still cannot qualify for Medicaid because she owns an asset, the annuity, worth $100,000 and she still owns the $100,000 in cash.

For years, the State has lost this argument in the federal courts. (The State once won a case in state court, sort of, so it has been encouraged that things will go its way if it keeps trying in federal court.) Federal courts have consistently stated that annuities are income items, not assets, and since the wife's income does not affect her husband's eligibility for Medicaid benefits, the wife's annuity does not affect the husband's eligibility for Medicaid.

Recently, CMS has taken the position before a federal court in Connecticut that fully supports this fact. Annuities are income for purposes of Medicaid eligibility, not assets.

This is very important, because the wife in my hypothetical can purchase an annuity for $100,000 and obtain Medicaid benefits for her husband immediately. The annuity must be structured correctly, which is not an easy task, but if done right, the purchase of an annuity can be a very valuable technique to preserve income for the wife who will continue to live at home and may continue to live long after her husband passes away.