Court Invalidates Pocket Deed As Fraudulent Effort to Defraud the Surviving Spouse

[The following is reprinted from my former newsletter, Your Estate Matters.]

A recent case from Tennessee illustrates the dangers inherent in using "pocket deeds." Pocket deeds are executed during the owner's life, but recorded after the owner's death.  While they are rarely used by attorneys or serious planners, they still find their way into the plans of individuals who may devise the schemes without legal advice.  

The case concerns the marriage of Ancie Lee Maness  and Jewell Maness,  When they married, he already had three grown sons and a 330-acre farm in Henderson County, Tennessee. He and Jewell both worked outside the farm.  Her income paid for food, utilities and household bills, but his  income was mostly used to pay expenses on the farm.

Mr. Maness ran a small herd of cattle at the farm, and allowed his sons to keep a few head of their own on the property. At different times, Mr. Maness even gave each of his sons an eight-acre parcel on the edge of the farm. It was clear, however, that Mr. Maness operated the farm, with only occasional help from his sons. Until 1992, the farm income, and Mr. Maness’ wages, went to pay off a mortgage on the farm as well.

Shortly after Mr. Maness’ death in 1993, one of the sons informed Mrs. Maness that he had transferred the farm to them nearly ten years earlier. When she investigated, she discovered that Mr. Maness had signed a deed to the property, conveying it to his three sons, and had given the deed to his son Willie. He had instructed Willie and his wife not to tell anyone about the deed, and to hold it in their safe deposit box.  They had removed it and recorded it three days after Mr. Maness’ death, and the title now appeared to be in the sons’ names.

Mrs. Maness sued to set aside the transaction, alleging that it was fraudulent because it had the effect of depriving her of her statutory right to inherit a portion of her husband’s property. In Tennessee, as in most states, a surviving spouse is entitled to at least a share of the deceased spouse’s estate, and Mrs. Maness argued that the transaction deprived her of that right.

Noting the secrecy with which the deed was cloaked, the Tennessee Court of Appeals agreed with Mrs. Maness. The court also noted that even by a conservative estimate the farm constituted nearly two-thirds of the value of Mr. Maness’ estate, and Mr. Maness’ behavior in hiding the transaction from his wife indicated that he had intended to defraud her of her inheritance rights. 

To read the entire case go here: Maness v. Estate of Maness, Tenn. Court of Appeals, November 12, 1997.

Medicare Premiums and Deductibles for 2016

The Centers for Medicare and Medicaid has announced the Medicare premiums, deductibles, and coinsurances for 2016. As expected, for the third year in a row the standard Medicare Part B premium that most recipients pay will hold steady at $104.90 a month.  However, about 30 percent of beneficiaries will see their Part B premium rise to $121.80 a month.  Meanwhile, the Part B deductible will increase for all beneficiaries from the current $147 to $166 in 2016. 

The Part B rise was supposed to be much steeper for the 30 percent of beneficiaries who are not “held harmless” from any increase in premiums when Social Security benefits remain stagnant, as will be the case for 2016.  But the premium rise was blunted by the Bipartisan Budget Act signed into law by President Obama November 2.  Medicare beneficiaries who are unprotected from a premium increase include those enrolled in Medicare but who are not yet receiving Social Security, new Medicare beneficiaries, seniors earning more than $85,000 a year, and “dual eligibles” who receive both Medicare and Medicaid benefits. For beneficiaries receiving skilled care in a nursing home, Medicare's coinsurance for days 21-100 will go up from $157.50 to $161.  Medicare coverage ends after day 100.  

Here are all the new Medicare figures:

• Basic Part B premium: $104.90/month (unchanged);
• Part B premium for those not “held harmless”: $121.80;
• Part B deductible: $166 (was $147);
• Part A deductible: $1,288 (was $1,260);
• Co-payment for hospital stay days 61-90: $322/day (was $315);
• Co-payment for hospital stay days 91 and beyond: $644/day (was $630);
• Skilled nursing facility co-payment, days 21-100: $161/day (was $157.50).

Higher-income beneficiaries will pay higher Part B premiums:

• Individuals with annual incomes between $85,000 and $107,000 and married couples with annual incomes between $170,000 and $214,000 will pay a monthly premium of $170.50 (was $146.90);
• Individuals with annual incomes between $107,000 and $160,000 and married couples with annual incomes between $214,000 and $320,000 will pay a monthly premium of $243.60 (was $209.80);
• Individuals with annual incomes between $160,000 and $214,000 and married couples with annual incomes between $320,000 and $428,000 will pay a monthly premium of $316.70 (was $272.70);
• Individuals with annual incomes of $214,000 or more and married couples with annual incomes of $428,000 or more will pay a monthly premium of $389.80 (was $335.70).

Rates differ for beneficiaries who are married but file a separate tax return from their spouse:

• Those with incomes between $85,000 and $129,000 will pay a monthly premium of $316.70 (was $272.70);
• Those with incomes greater than $129,000 will pay a monthly premium of $389.80 (was $335.70).

The Social Security Administration uses the income reported two years ago to determine a Part B beneficiary's premiums. So the income reported on a beneficiary's 2014 tax return is used to determine whether the beneficiary must pay a higher monthly Part B premium in 2016. Income is calculated by taking a beneficiary's adjusted gross income and adding back in some normally excluded income, such as tax-exempt interest, U.S. savings bond interest used to pay tuition, and certain income from foreign sources. This is called modified adjusted gross income (MAGI). If a beneficiary's MAGI decreased significantly in the past two years, she may request that information from more recent years be used to calculate the premium. Those who enroll in Medicare Advantage plans may have different cost-sharing arrangements.  The average Medicare Advantage premium is expected to decrease slightly, from $32.91 on average in 2015 to $32.60 in 2016.  

For Medicare’s press release announcing the new  figures, click here.  

For Medicare's "Medicare costs at a glance," click here. 

Resident Who Transferred Assets and Applied for Medicaid Breached CCRC Contract

A New York appeals court held that a continuing care retirement community (CCRC) resident is required to spend the assets disclosed in the CCRC’s admission agreement on nursing home care before applying for Medicaid. Good Shepard Village at Endwell Inc. v. Yezzi (N.Y. Sup. Ct., App. Div., 3rd Dept., No. 520621, Nov. 5, 2015).  The decision means that CCRC resdidents should proceed cautiously with Medicaid eligibility planning.

Hazel and Peter Yezzi moved into a CCRC after signing an admission agreement that disclosed their assets. The contract with the CCRC provided that that the Yezzis could not transfer their assets for less than fair market value if it would impair their ability to pay their monthly fees. Mrs. Yezzi entered the nursing home, transferred her assets to Mr. Yezzi, and applied for Medicaid. The CCRC refused to accept the Medicaid payments.

The CCRC sued Mr. Yezzi (Mrs. Yezzi died in the nursing home) for breach of contract and fraudulent conveyance, arguing that the Yezzis were obligated to use the funds disclosed in the CCRC admission agreement before applying for Medicaid. The trial court granted the CCRC summary judgment, and Mr. Yezzi appealed.

The New York Supreme Court, Appellate Division, 3rd Dept., affirmed, holding that Mrs. Yezzi's transfer of assets for less than fair market value constituted a breach of contract. According to the court, under federal and state law the CCRC "could require a resident to first spend the resources identified upon admission before applying for Medicaid" because "the essence of the CCRC financial model requires a tradeoff between the resident and the facility, in which the resident must disclose and spend his or her assets for the services provided, while the facility must continue to provide those services for the duration of the resident's lifetime even after private funds are exhausted and Medicaid becomes the only source of payment."

Social Security Claiming Rules Changed to Eliminate Beneficial Strategies

President Obama has signed the Bipartisan Budget Act of 2015 which includes important changes to the Social Security retirement system.  Among these changes are Rules that are designed to close "unintended loopholes" in the Social Security Act. These "loopholes" are the "file and suspend" and "restricted application" claiming strategies. These strategies are used by applicants to provide necessary income, but permit social security benefits to continue to grow, permitting later claiming of benefits at larger benefit amounts.  

Under the new law, some groups of Social Security claimants are wholly unaffected, while others will lose all access to available claiming strategies.  If you are not already implementing a claiming strategy, you may find that the strategy is no longer available to you.  

The new law adversely impacts the following groups:

1. Divorcees who were born in 1954 or later;
2. Couples where the person who was previously planning to claim a spousal benefit first then switch to their own benefit later under a restricted application strategy was born after 1953;
3. Couples who are planning to pursue a file and suspend strategy, but wait more than six months to file and suspend.

Divorcees born after 1953 will be able to claim either a spousal benefit or their own retirement benefit (whichever is larger), but they will not be able to switch from one to the other at a later time.  Claimants born after 1953 will not be able to claim one benefit and then switch to another benefit later under the new law, affecting those who intended to employ a restricted application strategy.

The new law allows people to file and suspend for another 180 days after the law goes into effect. If someone waits more than six months, they will not be able to use this strategy. They will be able to pursue a restricted application strategy if the person who claims the spousal benefit was born in 1953 or earlier.

The new law does not affect claiming strategies for the following groups:

1. Single people;
2. Widowers;
3. Divorcees who were born in 1953 or earlier; and
4. Couples who are already pursuing a restricted application claiming strategy (These are couples where the primary beneficiary has already claimed his/her benefit and the spouse has claimed a spousal benefit. The spouse will still be able to switch to their own benefit at a later date.);
5. Couples who are already pursing a file and suspend strategy (These are couples where the primary beneficiary has already filed and suspended, and the spouse has claimed a spousal benefit. The spouse will still be able to claim their own benefit at a later date. The primary beneficiary will also be able to claim his/her own benefit at a later date.);
6. Couples who are planning to pursue a restricted application strategy and the person who plans to claim a spousal benefit was born in 1953 or earlier (These are couples where the primary beneficiary plans to claim his/her benefit in the future- or has already claimed a benefit- but the spouse has not yet claimed a spousal benefit. As long as the spouse was born in 1953 or earlier, the spouse will be able to claim a spousal benefit after reaching 66 and then claim their own benefit later.);
7.  Couples who plan to pursue a file and suspend strategy before sometime in late April or early May of 2016, and the person who plans to claim a spousal benefit was born in 1953 or earlier (The new law provides a window of 180 days after the law becomes effective where couples can still use the file and claim strategy).

Previously Recommended Strategies

If you have received a written strategy, plan, or analysis from a professional, you will need to consult with the professional before implementing the plan.  Generally,  however, the following are suggestions for helping to determine whether previous recommendations are valid:

• If a scenario recommends “file and suspend” it is probably no longer a valid recommendation, unless the the claimant can can sensibly file and suspend no later than about May 1, 2016 (The precise cut-off date is 180 days after the law becomes effective, which appears to be 11/2/15.);
• If the scenario recommends a “restricted application” (and no file and suspend strategy is involved), it is almost surely a valid recommendation if the claimant is born in 1953 or earlier. If a claimant is born in 1954 or later, a recommendation to file a restricted application is no longer valid. NOTE: Whether this statement also applies to ex-spouses is presently unclear.

If you have already implemented a strategy, it is best for you to consult with your financial adviser or professional to ensure that future actions pursuing the plan are not foreclosed by the new law.

The bottom line for those who may be retiring is that the government has now made it more difficult for you to comfortably forestall claiming social security at a later age, where the benefit paid to you is higher and more valuable over your life.  The effect will be that millions will continue to claim social security at the first availability, leaving the government responsible for paying less in social security benefits.    

Married Couples Should Reconsider Home Ownership In Trust

A narrowly divided Ohio Supreme Court has ruled that the transfer of a home between spouses prior to Medicaid eligibility is an improper transfer and is subject to the community spouse resource allowance (CSRA) cap.  Estate of Atkinson v. Ohio Department of Job and Family Services (Ohio, No. 2013–1773, Aug. 26, 2015). More particularly, the decision means that home ownership in a revocable trust is not without consequence when applying for Medicaid.  

The facts of the case present what was "garden variety" conduct of a client before applying for Medicaid.  In 2000, Marcella Atkinson and her husband transferred their home into a revocable living trust. In April of 2011, Mrs. Atkinson entered a nursing home and soon applied for Medicaid benefits. In August 2011, following Medicaid’s “snapshot” of the couple’s assets, the home was removed from the trust and placed in Mrs. Atkinson's name. The next day, Mrs. Atkinson transferred the house to her husband. Most attorneys counselled clients regarding such a procedure, and many county caseworkers told applicants of these steps, seemingly necessary to avail the community spouse of the exemption available to the family home.

It is important to know what the "snapshot"  means;  the "snapshot date" is the day on which the ill spouse enters either a hospital or a long-term care facility in which s/he then stays for at least 30 days. This is called the "snapshot" date because Medicaid is taking a picture of the couple's assets as of this date. 

The State in Atkinson, however, determined an improper transfer had occurred and imposed a penalty period.  Mrs. Atkinson passed away, and her estate appealed to court, arguing that under federal and state statutes a spouse is not ineligible from receiving Medicaid for transferring a home to the other spouse, and that an institutionalized spouse may transfer unlimited assets to the community spouse between the date the spouse is institutionalized and the date that the spouse's Medicaid eligibility is determined. The estate lost at both the trial court and the Ohio Court of Appeals, and the estate appealed.  

In a 4-3 decision, the Supreme Court of Ohio ruled that transfers between spouses are not

unlimited after the snapshot date and before Medicaid eligibility and that such transfers are proper only up to the amount that fully funds the CSRA. The snapshot date is the first day of institutionalization The court rejected the estate’s reliance on the Sixth Circuit Court of Appeals’ holding in Hughes v. McCarthy (6th Cir., No. 12-3765, Oct. 25, 2013) that an annuity purchased by a community spouse before a Medicaid eligibility determination is not an improper transfer, finding that the purchase of annuities are subject to special rules and “not applicable under these facts.”  The court remanded the case for review of the penalty imposed because the Medicaid agency may have applied the wrong statute.  “Neither federal nor state law,” the court wrote, “supports the agency's confiscation, after the CSRA has been set, of the entire amount of transferred assets, some or all of which may have already been allocated to the community spouse on the snapshot date.”

A dissent joined by three justices states that “What this family did is and was permitted by state and federal law. . .  the home is explicitly excluded from the definition of 'resources' for purposes of establishing the CSRA.” [emphasis in original].  The dissent reads in part:

It is clear that the law treats the marital home very carefully to prevent spousal impoverishment at the end of life. And that is the public policy we should be embracing. Based on the plain language of the federal statutes and the Ohio Administrative Code, as well as the holding of the United States Court of Appeals for the Sixth Circuit in Hughes v. McCarthy, 734 F.3d 473, I would hold that the transfer of the home between spouses prior to Medicaid eligibility being established is not an improper transfer and is not subject to the CSRA cap.

The case has significant implications for routine planning using a revocable trust.  Typically, a marital couple would convey the home to the revocable trust in order to accomplish objectives best accomplished with the trust.  Now, the transfer to the trust is problematic, because the home could not be transferred to a community spouse after a spouse enters an institution.

The ill effect is not necessarilly loss of the home; since the home is illiquid it would not be spent down.  The community spouse's CSRA, however, which represents the maximum amount of resources permitted the community spouse from the countable assets, currently $119,220.00, would be compromised, and possibly lost.  The ill effect would be the community spouse being forced to spend down the liquid assets that would otherwise keep him or her from impoverishment.   

Although the ill effect might be avoided if the need for long term care follows a possible event triggering the need, such as when a person suffers from dementia, there is never a guarantee that a person won't suffer an immediate catastrophic event, such as an automobile accident, stroke, aneurysm, heart attack, adverse drug reaction, complication to a routine medical procedure, fall, or the like.  In these cases a couple may be rendered powerless to improve their situation, and the home value will remain a countable asset.  

Our office is recommending that couples consider preparing a deed transferring the property from the trustees of the trust to the spouses/grantors of the trust, holding the property in a joint tenancy with full rights of survivorship, and employing a Transfer On Death Affidavit conveying the property at the death of the survivor to the trustee of the trust.  This strategy avoids probate, and confers to the home the other benefits of the trust at death (e.g., asset protection planning for your beneficiaries, equitable or proportional distribution of assets, private management, and the like).  

The obvious adverse consequence of this tactic is the home is no longer protected in the same way from guardianship.  A trust avoids guardianship by 1) identifying an alternate decision-maker and thereby eliminating the need for a guardian, 2) removing the incentive for hostile or predatory guardianship by removing assets from the guardianship estate, and 3) setting forth a procedure for appointment of a successor decision-maker with your personal physician empowered to decide issues of competency or capacity rather than reliance upon governmental or judicial determinations.  With the home removed from the protection of the trust, it might remain an incentive for a hostile guardian.

The nature of the home as an asset, and particularly the need of the community spouse to live in the home, however, should make the guardianship risk acceptable; it is unlikely a guardian will be able to obtain permission to sell a home when there is a spouse requiring the home as a residence.  In most cases, the relatively small risk must be balanced against the ill effect of a potential future need for Medicaid. 

Clients and advisers should take this risk seriously because the need for long-term care is inherently unpredictable, and the risk cannot be easily discounted.  The cost, too, of long-term care is unpredictable.  Medicare does not, typically, pay for long-term care.  Only long-term care insurance (preferably a policy that leverages a death benefit for long-term care benefits) or a robust financial plan can buttress your assets in meeting the cost of long-term care. 

To read the article discussing the oral arguments, which took place over a year before the Supreme Court's decision, go here.

For the full text of this decision, click here.

This blog post was originally published here.