Do TOD Accounts Mean I Don’t Need an Estate Plan?

Many people incorporate a TOD, or “Transfer on Death” into their financial plan, thinking it will be easier for their loved ones because it will avoid probate.  They often do this at the suggestion of bankers or financial professionals, and they believe it avoids the need for having a trust or even a will.  However, the article “TOD Accounts Versus Revocable Trusts—Which Is Better?” from Kiplinger explains how it really works.

The TOD account allows the account owner to name a beneficiary on an account who receives funds when the account owner dies. The TOD is often used for stocks, brokerage accounts, bonds and other non-retirement accounts, and is akin to having a beneficiary named on the account.  It’s worth pointing out that I’m using TOD as a general term here, the specific term might be different for different types of assets.  For example, a POD, or “Payable on Death,” account is usually used for bank assets—cash.  You can find more information about pitfalls of beneficiary designations here.  https://galligan-law.com/common-mistakes-made-on-beneficiary-designations/ 

The chief goal of a TOD or POD is to avoid probate. The beneficiaries receive assets directly, bypassing probate, keeping the assets out of the estate and transferring them faster than through probate. The beneficiary contacts the financial institution with an original death certificate and proof of identity.  The assets are then distributed to the beneficiary. Banks and financial institutions can be a bit exacting about determining identity, but most people have the needed documents.

There are pitfalls. For one thing, the executor of the estate may be empowered by law to seek contributions from POD and TOD beneficiaries to pay for the expenses of administering an estate, estate and final income taxes and any debts or liabilities of the estate. If the beneficiaries do not contribute voluntarily, the executor (or estate administrator) may file a lawsuit against them, holding them personally responsible, to get their contributions.

If the beneficiary has already spent the money, or they are involved in a lawsuit or divorce, turning over the TOD/POD assets may get complicated. Other personal assets may be attached to make up for a shortfall.

Very frequently, naming a TOD/POD beneficiary in an estate that otherwise expects to go through probate (i.e. a will-based estate plan) leads to having non-liquid assets such as a house which cost money to administer, and no money with which to do so.

If the beneficiary is receiving means-tested government benefits, as in the case of an individual with special needs, the TOD/POD assets may put their eligibility for those benefits at risk.  This is a very, very common problem when a loved one has a disability.

Very simply too, beneficiaries under TOD/POD accounts can predecease an owner with no meaningful way to handle contingencies.  If that happens, the asset will be subject to probate which will negate their advantage, and may not go to the proper beneficiaries.  Utilizing trusts can solve that problem.

These and other complications make using a POD/TOD arrangement riskier than expected.

A trust provides more benefit to the trustor (creator of the trust) and in fact can work in conjunction with TODs as part of a complete, integrated plan.  Trusts address control of assets upon incapacity because trustees will be in place to manage assets for the trustor’s benefit. With a TOD/POD, a Power of Attorney would be needed to allow the other person to control of the assets. The same banks reluctant to hand over a POD/TOD are even more strict about Powers of Attorney, even denying POAs, if they feel the forms are out-of-date or don’t have the state’s required language.  People often don’t think of trusts as part of incapacity planning, but this is often a benefit to a trust-based plan.

Similarly, trusts (whether an asset named the trust as beneficiary of a TOD/POD or if it owns the assets themselves) can address contingencies.  So, if a beneficiary has a disability, potential divorce, creditors, predeceases the owner, or virtually any other reason for them not to directly receive money, the trust can provide for what happens under all of those contingencies.

Creating a trust with an experienced estate planning attorney allows you to plan for yourself and your beneficiaries, and if you chose to avoid probate, to do so in a way that will work for all of your assets and to avoid problems created by solely using TOD/POD accounts.

Reference: Kiplinger (Dec. 2, 2021) “TOD Accounts Versus Revocable Trusts—Which Is Better?”

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Estate Planning for Blended Families

When a couple in a blended family fails to address what will happen after the first spouse dies, families often find themselves embroiled in disputes.  According to the article “In blended families, estate planning can have unintended issues” from The News-Enterprise, this is more likely to occur when spouses marry after their separate children are already adults, don’t live in the parent’s home and have their own lives and families.

In this case, the spouse is seen as the parent’s spouse, rather than the child’s parent. There may be love and respect. However, it’s a different relationship from long-term blended families where the stepparent was actively engaged with all of the children’s upbringing and parents consider all of the children as their own.

For the long-term blended family, the planning must be intentional. However, there may be less concern about the surviving spouse changing beneficiaries and depriving the other spouse’s children of their inheritance. The estate planning attorney will still raise this issue, and the family can decide how important it is to them.

When relationships between spouses and stepchildren are not as close, or are rocky, estate planning must proceed as if the relationship between stepparents and stepsiblings will evaporate on the death of the natural parent. If one spouse’s intention is to leave all of their wealth to the surviving spouse, the plan must anticipate trouble.

One very common approach to this issue is to set up a trust for the surviving spouse, which is often called a marital trust.  This establishes a trust for the benefit of the spouse, but whatever remains in the trust will go to the deceased spouse’s beneficiaries.  So, you can have your spouse benefit from your money, but make sure what’s left goes to your kids.

In some families, there is no intent to deprive anyone of an inheritance. However, failing to plan appropriately—having a will, setting up trusts, etc.—is not done and the estate plan disinherits children.

It’s important for the will, trusts and any other estate planning documents to define the term “children” and in some cases, use the specific names of the children. This is especially important when there are other family members with the same or similar names or perhaps a lack of clarity as to who the children are.

In Texas, this issue is even bigger when you don’t have an estate plan for a blended family.  If the decedent raised a stepchild in their home, they could potentially be considered a child of the decedent through adoption by estoppel.  If that’s true, then they are a child as far as the estate is concerned.

As long as the parents are well and healthy, estate plans can be amended. If one of the parents becomes incapacitated, changes cannot be legally made to their wills. If one spouse dies and the survivor remarries and names a new spouse as their beneficiary, it’s possible for all of the children to lose their inheritances.

Most people don’t intend to disinherit their own children or their stepchildren when estate planning for blended families. However, this occurs often when the spouses neglect to revise their estate plan when they marry again, or if there is no estate plan at all. An estate planning attorney has seen many different versions of this and can create a plan to achieve your wishes and protect your children.

It also makes sense to consider the children’s role in your finances as you age as the blended family situation may complicate the matter.  See this article where I addressed that more specifically.  https://galligan-law.com/the-blended-family-and-issues-with-finances-and-estate-planning/  

A final note: be realistic about what may occur when you pass. While your spouse may fully intend to maintain relationships with your children, lives and relationships change. Clients often struggle to confront this or admit it to themselves, but I assure you it comes out later, and we can plan better when all of the issues are addressed.  With an intentional estate plan, parents can take comfort in knowing their property will be passed to the next generation—or two—as they wish.

Reference: The News-Enterprise (Dec. 7, 2021) “In blended families, estate planning can have unintended issues”

 

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Medicaid Spend Down Strategies

Medicaid is not just for the indigent.  Medicaid is a government program which offers a variety of benefits to those in need, which includes elderly individuals who need assistance with paying for long term care costs. With the right planning, assets can be protected for the next generation, while helping a person become eligible for help with long term care costs.

Medicaid was to help with insurance coverage and protect seniors from the costs of medical care, regardless of their income, health status or past medical history, reports Kiplinger in a recent article “How to Restructure Your Assets to Qualify for Medicaid.” Medicaid was a state-managed, means-based program, with broad federal parameters that is run by the individual states. Eligibility criteria, coverage groups, services covered, administration and operating procedures are all managed by each state.

With the increasing cost and need for long term care, Medicaid has become a life-saver for people who need long term nursing home care costs and home health care costs not covered by Medicare.  So, this article will discuss various techniques and ideas on how to become eligible for Medicaid when appropriate.  However, this article is for ideas only, and I cannot stress this enough, but you should never undertake a Medicaid spend down without the advice and direction of an attorney.

If the household income exceeds your state’s Medicaid eligibility threshold, two commonly used trusts may be used to divert excess income to maintain program eligibility and thereby spend down income.

QITs, or Qualified Income Trusts. Also known as a “Miller Trust,” income is deposited into this irrevocable trust, which is controlled by a trustee. Restrictions on what the income in the trust may be used for are strict, and include things such as medical care costs and the cost of private health insurance premiums. However, the funds are owned by the trust, not the individual, so they do not count against Medicaid eligibility.  This tool is extremely effective, which facilities eligibility despite the amount of income.

If you qualify as disabled, you may be able to use a Pooled Income Trust. This is another irrevocable trust where your “surplus income” is deposited. Income is pooled together with the income of others. The trust is managed by a non-profit charitable organization, which acts as a trustee and makes monthly disbursements to pay expenses for the individuals participating in the trust. When you die, any remaining funds in the trust are used to help other disabled persons.

Meeting eligibility requirements are complicated and vary from state to state. An estate planning attorney in your state of residence will help guide you through the process, using his or her extensive knowledge of your state’s laws. Mistakes can be costly, and permanent, and often appear in Medicaid spend down.

For instance, your home’s value (up to a maximum amount) is exempt, as long as you still live there or intend to return. Several other exemptions may apply depending on the assets.  Otherwise, the amount of countable assets for an individual is $2,000, more for a married couple.

Transferring assets to other people, typically family members, is a risky strategy. There is a five-year look back period and if you’ve transferred asset without getting adequate value in return during that period your eligibility could be affected. So, gifting strategies could be risky.  If the person you transfer assets to has any personal financial issues, like creditors or divorce, they could lose your property.

Asset Protection Trusts, also known as Medicaid Trusts. You may transfer most or all of your assets into this trust, especially if they are otherwise countable. Upon your death, assets are transferred to beneficiaries, according to the trust documents.  This needs to be done in advance of the 5 year look-back, which is why this works best in anticipation of long term care need in the future, not when its imminent.

Right of Spousal Transfers and Refusals. Assets transferred between spouses are not subject to the five-year look back period or any penalties. Some states allow Spousal Refusal, where one spouse can legally refuse to provide support for a spouse, making them immediately eligible for Medicaid. The only hitch? Medicaid has the right to request the healthy spouse to contribute to a spouse who is receiving care but does not always take legal action to recover payment.

I should also point out that Medicaid recovery is an important aspect of Medicaid planning.  You can see this link for more details on that topic.  https://galligan-law.com/protect-assets-from-medicaid-recovery/

Talk with your estate planning attorney if you believe you or your spouse may require long-term care and before undertaking Medicaid spend down. Consider the requirements and rules of your state. Keep in mind that Medicaid gives you little or no choice about where you receive care. Planning in advance is the best means of protecting yourself and your spouse from the excessive costs of long term care.

Reference: Kiplinger (Nov. 7, 2021) “How to Restructure Your Assets to Qualify for Medicaid”

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