Legal Anatomy: Simple Wills Could Lead To Big Problems

Legal Anatomy: Simple Wills Could Lead To Big Problems

Although simple wills are sometimes adequate, planning for the worst-case scenario is the general perspective of the estate planning attorney. You don’t have to be wealthy to need estate planning. The following are facts of a case and solutions from the perspective of the estate planning attorney.

Facts: Married couple has $300,000 of cash resources including checking, savings, investment and retirement accounts. They also have a homestead and a joint interest in property with a disabled son who is receiving “means-tested” Medicaid. One spouse has had a stroke – but is neither disabled nor on public benefits. There are limited family members who the couple trusts to be a fiduciary. They presently have a simple will and general estate planning documents. Long-term care insurance can no longer be obtained by the spouse who had the stroke.

Here are a few of the questions that came to mind for the attorney:

Question 1 – Will vs Revocable trust?

Answer – In this case, a will is best since you can only have a supplemental needs trust (for Medicaid purposes) for a surviving spouse if the trust is created by a will. A will with a contingent supplemental needs trust for a spouse must go through probate. A supplemental needs trust for a spouse created in a revocable living trust would result in the assets held within the trust as countable (unlike if the assets were distributed to the supplemental needs trust by will). Medicaid must be considered for several reasons: (a) the spouse who had the stroke will not pass underwriting for long-term care insurance; (b) if the surviving spouse is the one who had the stroke and needed long-term care, then all countable resources (including the interest held in the home jointly owned with the adult disabled child) would be subject to spend-down. An applicant who is single can only have $2000 of countable resources. So in order for the assets to be stretched so that the government will help pay for care of the adult disabled child after the death of his parents, the will would also include a contingent supplemental needs trust for the benefit of the adult disabled child. The government encourages helping those who are disabled.

Question 2 – Could a trust be created in the will for the surviving spouse’s benefit whether such spouse is disabled or not?

Answer – Yes. Language could give the trustee the option on the trust terms. For example, the trustee could simply be given the power to distribute trust assets for health, education, maintenance and support under Texas law instead of only having language to supplement, rather than support, Medicaid benefits.

Question 3 – Should assets be transferred from one spouse to the other?

Answer – Maybe. Several issues should be considered. Is there a risk of divorce? If so, the assets should not be transferred. If assets were transferred to the spouse who was the survivor, there may have been lost opportunity for a step-up in basis resulting in potential capital gains tax if the surviving spouse sold appreciated assets. The reason for transferring assets to the spouse who is less likely to be disabled or need care is if the spouse died first, the assets in the supplemental needs trust for the surviving spouse would not be subject to spend-down and all assets would be protected. Transfers between spouse’s are not subject to a look-back period for Medicaid.

Question 4 – What if you have no individual you trust to be a trustee for the disabled beneficiary?

Answer – If the assets are large enough, banks could be a trustee for a disabled individual. Some banks are very familiar with this type of trust and others are not. If assets are too small, there are certain pooled trusts (a special needs trust where participants enter into a joinder agreement where assets of others who are disabled are pooled and administered by a professional trustee) who can manage and invest the assets held in the trust.

Question 5 – What if the professional trustee will not accept real estate?

Answer – Sometimes when the trustee is a bank or trust company, they will not accept real estate as they want to only invest the assets. As a result, a condition could be made that if there is no individual acting as a trustee, then there could be a specific bequest of the home to the disabled child since a home is not a countable resource (generally). Assets held in the supplemental or special needs trust could be used to pay the house expenses, although supplemental security income could possibly be reduced.

The preceding paragraphs are only some of the legal issues (Medicaid for spouse and child, capital gains tax, trustee selection, wills vs. trusts, trust distribution options, assets that a trustee would accept, etc.) that should be considered that would not be covered by a simple will.

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming Estate Planning Essentials workshops by clicking here or calling 214-720-0102. We make it simple to attend and it is without obligation.

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