The Dangers of a Joint Bank Account

Many elderly people add a child’s name to their bank accounts. The reason most elderly people do this is to permit the child to access the account in order to pay their bills. For instance, if the elder is sick and in the hospital, he believes that having his son named on his bank account will permit the son to pay his bills until he’s well enough to resume doing it for himself.

Few people, however, consider all the negative aspects to having someone else named on their accounts. If you put another person’s name on your bank account, then that person is an owner of the account.

While you might trust your child, the fact of the matter, as a joint account holder, the child is free to use your money anyway he wants to use your money. There are no restrictions on his use of your money.

If your child is involved in an automobile accident and is sued, his creditors can come after your money to satisfy any judgment they might be obtain against your child. If your son has credit card debts, his creditors can sue him and possibly come after your money to satisfy his debts.

If your son gets divorced, his soon-to-be-ex-spouse might claim that the money in the joint account is his money and, therefore, her money to an extent.

Obviously, the worst thing that can happen to any of us is death, and death often brings about the worst results with joint accounts. For instance, assume that Mary has joint accounts with her brother. She put her brother’s name on her accounts because she wanted her brother to be able to pay her bills in the event she was no longer capable of paying her bills herself, for instance, if she were sick.

Mary has two stepchildren and a child of her own. In her Will, she leaves a quarter of her estate to her two stepchildren, a quarter of her estate to her child, and a quarter of her estate to her brother.   Mary dies. The majority of her estate is held in the joint accounts on which her brother is named as a joint account holder.

The banking law governing joint accounts states that money in a joint account passes to the joint account holder unless the beneficiaries of Mary’s estate can prove by clear and convincing evidence that Mary placed the name of the joint account holder on the account purely as a matter of convenience. Stated otherwise, the beneficiaries would have to present very strong evidence that Mary only added her brother to the accounts in order to pay her bills. Absent a very high level of proof, the money in the accounts will pass to the brother, irrespective of the terms of Mary’s Will.

Furthermore, even if the brother wants to share the money in the accounts with the other beneficiaries or even if the beneficiaries could prove that Mary only added her brother’s name to the accounts as a matter of convenience (to permit him to pay her bills), the New Jersey Division of Taxation will subject the entire amount in the accounts to the New Jersey Inheritance Tax as if the accounts pass to the brother.

An inheritance passing to a brother is subject to New Jersey inheritance tax. An inheritance passing to stepchildren and a child is not subject to the inheritance tax. But because of the joint nature of the accounts and because of the banking law that says the entire account passes to the brother, the tax division will tax the entire account as passing to the brother.

So, what is the simple solution to the problems inherit in putting some else’s name on your accounts as a joint owner? Have a power of attorney. A power of attorney document is a document that allows someone else to access your accounts for your benefit without that person being an owner of the account. None of the aforementioned problems exist when you use a power of attorney.

The Never Ending Penalty Period

A recent decision of the Superior Court of New Jersey, Appellate Division, serves as a cautionary tale for those seeking to qualify for Medicaid benefits on their own. Medicaid is a health payment plan for needy individuals.

If a person qualifies for Medicaid, the program will pay for their long-term care needs, such as care in a nursing home. Nursing homes cost anywhere from $9,000 to $12,000 a month, so many people who never thought they might want to qualify for Medicaid find themselves being desirous of qualifying for the program when they require long-term care.

Being a means-tested program, an individual must have very limited assets in order to qualify for Medicaid benefits. In New Jersey, the asset limit is $2,000.

A natural instinct that people have is to give away their assets when they are failing and may need care. The idea being, if I don’t have the money, then I’ll qualify for Medicaid.

Obviously, the politicians who wrote the Medicaid laws are acutely aware of this natural inclination. So, they wrote certain provisions into the Medicaid laws that punish people for disposing of their assets.

The key provision addressing gifting in the Medicaid Act is commonly known as the “lookback period.” The lookback period is the period of time that begins five years before a Medicaid applicant files an application for benefits. In other words, if you file an application on September 1, 2015, the lookback period for that application will look back to October 1, 2010.

Assume that Mr. Smith files an application for Medicaid on September 1, 2015. The Medicaid office will ask for statements from all of his financial accounts for the time period beginning October 1, 2010, and continuing through the date when he is eventually determined to be eligible for Medicaid benefits.

Assume that Mr. Smith gave away $50,000 of assets during his lookback period. Assume that he gave $10,000 to each of his five grandchildren.

The Medicaid office will assess a penalty period against Mr. Smith for his having given away $50,000. A penalty period is a period of ineligibility for Medicaid benefits. If Mr. Smith is ineligible for Medicaid, then the Medicaid program will not pay for Mr. Smith’s long-term care expenses, and Mr. Smith will have to find another means of paying for his care in the nursing home, or face eviction from the nursing home.

The way the Medicaid program calculates a penalty period is by taking the gross value of the assets transferred ($50,000) and dividing that figure by a divisor number. The divisor number is supposed to equal the average cost of a nursing home room in the state of New Jersey. The current divisor figure is roughly $10,000. Taking the value of the gifts ($50,000) and dividing that by the divisor figure ($10,000) yields a result of 5, which is the number of months that Mr. Smith is ineligible for Medicaid, five months.

A penalty period can actually be unlimited in duration, so if Mr. Smith transferred $1,000,000 during the lookback period, he would be ineligible for 100 months, which is $1,000,000 divided by $10,000.

What the recent Appellate Division case tells us is that once a penalty period is assessed by the Medicaid office, that penalty period cannot be undone unless all of the assets are returned to the applicant. So, in other words, if Mr. Smith transfers $1,000,000 and applies for benefits within five years of that transfer, a 100 month period of ineligibility will be assessed against him.

Unless the entire $1,000,000 is returned to Mr. Smith, Mr. Smith cannot simply wait five years after the transfer and re-apply for benefits, hoping that Medicaid will forget about the 100 month penalty; they won’t forget about it. Once assessed, Mr. Smith now has to wait out the 100 month penalty period.

There are so many potential hazards to filing an application for Medicaid benefits that I believe most every person could benefit from legal advice before undertaking this task.

Federal Victory for Annuities

The United States Court of Appeals for the Third Circuit recently decided a case that greatly impacts Medicaid planning in New Jersey. I was fortunate enough to write one of the legal briefs that were filed with the Third Circuit. I was asked to write a brief on behalf of the National Academy of Elder Law Attorneys in support of the Medicaid applicant’s appeal.

The Third Circuit is the federal appeals court that handles appeals from federal trial courts located in New Jersey, Pennsylvania, and Delaware. The Third Circuit is an appellate court immediately below the Supreme Court of the United States, so what the Third Circuit has to say on a legal issue is very important and often is the final word on an issue.

Medicaid is a medical payment program for needy individuals. If an individual qualifies for Medicaid, Medicaid will pay for most of the costs associated with long-term care, such as care in a nursing home. Because long-term care can be so expensive, costing anywhere from $9,000 to $12,000 a month for a nursing home in New Jersey, many individuals who never thought they would have to qualify for a needs-based program such as Medicaid find themselves wanting to qualify for Medicaid if they require long-term care.

Medicaid planning is a process through which individuals, usually in conjunction with an elder law attorney, seeks to qualify for Medicaid quicker than they would qualify for Medicaid without planning, preserving a portion of their estate for themselves or their family. There are many different Medicaid planning techniques that elder law attorneys employ.

One technique involves the use of a Medicaid-complaint annuity to convert assets into a stream of income. Assume the following facts: Mr. Smith resides in a nursing home. Mrs. Smith lives at home. The Smiths own the following assets—a home, a car, and $200,000 in cash.

The Medicaid program will permit Mrs. Smith, who is known as the “community spouse” in Medicaid parlance, to retain the home, the car, and half the cash, or $100,000. The other half of the cash must be spent down on Mr. Smith’s care, or at least that is what Medicaid would want the Smiths to do with that cash.

Assets, such as the $200,000, are all counted against Mr. Smith’s eligibility for Medicaid except for the assets that the Medicaid program permits Mrs. Smith to retain, which in this example is $100,000. Income, on the other hand, belongs to the person whose name is on the check. So, for instance, even if Mrs. Smith received $20,000 a month in income from a pension, all of that income would be hers and would not affect Mr. Smith’s eligibility for Medicaid.

Because Mrs. Smith’s income does not affect Mr. Smith’s eligibility for Medicaid and because payments from a properly structured annuity are considered income, Medicaid-complaint annuities offer a planning technique. In the example above, if Mrs. Smith were to purchase an irrevocable, non-assignable annuity with the $100,000 that she otherwise would have to spend down on Mr. Smith’s care and if that annuity paid her back the purchase price of the annuity plus interest over a period of time that was actuarially sound given her age, then the annuity would effectively convert the extra $100,000 into a stream of income that did not count against Mr. Smith’s eligibility for Medicaid. Mr. Smith would qualify for Medicaid immediately.

The question the Third Circuit recently answered is, What is the definition of actuarially sound? More specifically, Can the term of an annuity be too short and, therefore, not actuarially sound?

Everyone accepts the fact that be to be actuarially sound, the payment term of the annuity cannot exceed Mrs. Smith’s actuarial life expectancy. So, if Mrs. Smith, age 80, had a life expectancy of 7 years, then the annuity must pay her back in no more than 7 years.

But what if the annuity paid her back in 1 year? Would it be actuarially sound then despite the short duration of the payment term? The Third Circuit said yes. While there is a ceiling to how long the annuity payment term can be, there is no floor. So, a 1 year annuity for someone with a 7 year life expectancy is actuarially sound.