The Importance of Checking Your Beneficiaries
Beneficiary designations play a crucial role when a person passes away. In fact, they can even override what's in a will. In some instances, the failure to change the name of a beneficiary in a life insurance policy, retirement account, bank account, or other investment account particularly following a divorce, death of a spouse, or death of a previously named beneficiary can result in dire consequences that may be entirely counter to the intent of the original policy or account holder.
You can typically name beneficiaries when you enroll in a company retirement plan such as a 401(k), purchase an annuity or life insurance policy, or open a retirement account. What's more, anyone may designate a beneficiary on a nonretirement account or set up a Transfer on Death account or a Payable on Death account.
When you name a beneficiary for an asset, the asset does not have to go through probate -- the often lengthy and expensive process by which a court allocates the elements of your estate in conformance with a decedent’s Will or under the law of intestate succession—where a person dies without a will. What's more, choosing a beneficiary may save you and your heirs some taxes, thus ensuring that your estate makes a bigger difference in the lives of your loved ones or does more good for your favorite charities. Your beneficiaries can be individuals, charities, or trusts -- but probably shouldn't include minor children. If you choose a minor as a beneficiary, most states will appoint a guardian, who must be bonded, and file accountings with the court each year until the child turns 18. When the minor turns 18 years of age, the court will turn over the assets to the minor child with no questions asked and irregardless of the possible consequences.
An alternative means of leaving your assets to someone under the age of eighteen could be designating a trust to receive and manage the inheritance. Creating a Uniform Transfer to Minors Act account and choosing someone you trust as its custodian is one relatively easy way to do that.
You can also designate a trust as beneficiary of retirement or other assets after your death, in order to retain control over the disposition of that money. Such a trust might allow a spouse to draw income from the trust, while preserving some assets for children or grandchildren Trusts can also be a tool for helping to provide for physically or mentally disabled family members. If you name the individual as a beneficiary, you could reduce his or her eligibility for government benefits. Moreover, he or she may not be able to manage the assets. Instead, an attorney might recommend creating a special needs trust.
It generally makes sense to name a spouse as beneficiary of your company retirement plan assets. He or she can roll those assets over into an IRA, where the money can continue to grow tax deferred -- perhaps for years or even decades. If naming a spouse isn't an option for an IRA, designating another relative or friend as a beneficiary is wiser than naming no one at all. One reason: If no beneficiary is designated for an individual's IRA, upon that person's death the account becomes payable to his or her estate and must be fully distributed within five years to the heirs of the estate, causing a substantial income tax liability.
Don't forget that your beneficiary designations will override your will. The will may state that you want your spouse to inherit everything -- but that might not happen if you named a previous spouse as beneficiary of your IRA or life insurance policy and then forgot to change that designation. This happens surprisingly often with dire consequences to the current spouse. With that in mind, it's essential to review your beneficiary (and contingent beneficiary) designations on an annual basis -- and make immediate changes after an important change in your family or financial status, such as a birth, death, divorce, or inheritance. Making such changes simply requires filling out a change of beneficiary form. You also may need to redesignate your beneficiaries when you or your employer replace your old retirement plan administrator or insurer. Request a confirmation of receipt when you send in a new beneficiary designation. Account administrators can't always be trusted to keep track of documents. The beneficiary designation doesn't take effect until the custodian, trustee, or administrator receives it -- and that must occur before the account holder dies.
Use beneficiary designations in concert with other vehicles such as wills and trusts, as well as your overall estate plan. For example, let's say you want to leave some assets to your children and some to your spouse. In that case, you probably will want to designate your spouse as beneficiary for your IRA -- since she can roll that money over into another IRA where it will continue to grow tax deferred. Meanwhile, your will can specify that your children receive your shares in a real estate partnership as an example. If you're like many folks, you don't even remember designating beneficiaries for your retirement plans, insurance policies, and other assets. Now is the best time to remedy that situation.
Spend a few hours checking with your financial advisor, insurance agent, employers, and the like, to make sure your money will go where you'd like it to go. And while you're at it, remind your parents or other family members to do the same. The results could make a significant difference in your family's long-term security and insure that your desires are carried out following your death.
Attorneys are frequently consulted regarding steps that an elderly person should take in order to avoid losing all of their life savings should they or a parent be required to go into a nursing home for long term care. More and more this area of the law is becoming a specialized area of legal practice known as elder law and persons seeking information in this area should be sure to consult an attorney who is familiar with the new laws that currently apply.
On February 8, 2006, President Bush signed into law the Deficit Reduction Act of 2005 (DRA), which cuts nearly $40 billion over five years from Medicare, Medicaid, and other programs. Of greatest interest to the elderly and their families, the new law places severe new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care. The DRA made significant changes to Medicaid’s long-term care rules, including the look-back period; the transfer penalty start date; the undue hardship exception; the treatment of annuities; community spouse income rules; home equity limits; the treatment of investments in continuing care retirement communities (CCRCs); promissory notes and life estates; and state long-term care partnership programs.
Following is a brief summary of the Medicaid laws before and after enactment of the DRA in these areas. Also, bear in mind that states including Tennessee are gradually coming into compliance with the new transfer rules.
The Look-Back Period
A person applying for Medicaid coverage of long-term care must disclose all financial transactions he or she was involved in during a set period of time--frequently called the "look-back period." The state Medicaid agency then determines whether the Medicaid applicant transferred any assets for less than fair market value during this period. The DRA extends Medicaid's "look-back" period for all asset transfers from three to five years. Previously, the agency reviewed transfers made within 36 months of the Medicaid application (60 if the transfer was to or from certain kinds of trusts). Now, the look back period for all transfers is 60 months. The extension of the look-back period will make the application process more difficult and could result in more applicants being denied for lack of documentation, given that they will need to produce five years worth of records instead of three.
The Penalty Period Start Date
The penalty period is the period during which a Medicaid applicant is ineligible for Medicaid payment for long term care services because the applicant transferred assets for less than fair market value during the look-back period. Before the DRA, the penalty period began either when the transfer was made or on the first day of the following month. It was possible for the penalty period to expire before the individual actually needed nursing home care. The DRA changes the start of the penalty period to the date when the individual transferring the assets enters a nursing home and would otherwise be eligible for Medicaid coverage but for the transfer. In other words, the penalty period does not begin until the nursing home resident is out of funds and has no money to pay the nursing home for however long the penalty period lasts. This change in the law could result in the gift that was previously made to achieve eligibility having to be retracted in order to pay for nursing home care during the penalty period. Therefore, the goal of saving assets to pass on to one’s heirs may not be achieved unless the gift is made at least five (5) years prior to applying for Medicaid.
Home Equity Limits
Before the DRA’s enactment, an individual could still qualify for long-term care services even if he or she had substantial assets in his or her home. Under the DRA, states will not cover long-term care services for an individual whose home equity exceeds $500,000, although states have the option of increasing this equity limit to $750,000. In all states and under the DRA, the house may be kept with no equity limit if the Medicaid applicant’s spouse or another dependent relative lives there.
The Treatment of Annuities
The DRA added requirements for disclosing immediate annuities, which have been useful estate planning tools. In its simplest form, an immediate annuity is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life or a prescribed time period. An immediate annuity can be used to convert assets into an income stream for the benefit of an institutionalized Medicaid applicant or the applicant's spouse. The state will not treat the annuity as an asset countable toward Medicaid’s asset limit ($2,000 in most states) as long as the annuity complies with certain requirements. The annuity must be: (1) irrevocable – the annuitant cannot take funds out of the annuity except for the monthly payments, (2) non-transferable – the annuitant cannot transfer the annuity to another beneficiary, and (3) actuarially sound - the payment term cannot be longer than the annuitant’s life expectancy and the total of the anticipated payments have to equal the cost of the annuity.
To these requirements, the DRA added an additional requirement. The state must be named the remainder beneficiary of any annuities up to the amount of Medicaid benefits paid on the annuitant’s behalf. If the Medicaid recipient is married or has a minor or disabled child, the state must be named as a secondary beneficiary. The Medicaid application must now also inform the applicant that if he or she obtains Medicaid benefits, the state automatically becomes a beneficiary of the annuity.
In addition, all annuities must be disclosed by an applicant for Medicaid regardless of whether the annuity is irrevocable or treated as a countable asset. If an individual, spouse, or representative refuses to disclose sufficient information related to any annuity, the state must either deny or terminate coverage for long-term care services or else deny or terminate Medicaid eligibility.
Promissory Notes and Life Estates
Prior to the DRA’s enactment, a Medicaid applicant could show that a transaction was an (uncountable) loan to another person rather than (countable) gift by presenting promissory notes, loans, or mortgages at the time of the Medicaid application. A promissory note is normally given in return for money and it is simply a promise to repay the amount. Classifying transfers as loans rather than gifts is useful because it allows parents to “loan” assets to their children permanently (gift) and still maintain Medicaid eligibility.
Congress considered this to be an abusive planning strategy, so the DRA imposes restrictions on the use of promissory notes, loans, and mortgages. In order for a loan to not be treated as a transfer for less than fair market value it must satisfy three standards: (1) The term of the loan must not last longer than the anticipated life of the lender, (2) payments must be made in equal amounts during the term of the loan with no deferral of payments and no balloon payments, (3) and the debt cannot be cancelled at the death of the lender. If these three standards are not met, the outstanding balance on the promissory note, loan, or mortgage will be considered a transfer and used to assess a Medicaid penalty period.
Prior to the DRA’s passage, another common estate planning technique was for an individual to purchase a life estate (a legal right to live in and possess a property) in the home of another person, such as a child. By doing this, the individual was able to pass assets to his or her children without triggering a transfer penalty. The DRA still allows the purchase of a life estate in another person’s home, but to avoid a transfer penalty, the individual purchasing the life estate must actually reside in the home for at least one year after the purchase.
Undue Hardship Exception
Before the DRA’s passage, federal law allowed for an exemption from the transfer penalty if it would cause "undue hardship," but the law did not establish procedures for determining undue hardship and left it up to states to create their own. The DRA finally sets out some rules and requires states to create a hardship waiver process that complies with specific language in the federal law. The new law provides that undue hardship exists when enforcing the penalty period for asset transfers would deprive the Medicaid applicant of (1) medical care necessary to maintain the applicant's health or life or (2) food, clothing, shelter, or necessities of life.
If an applicant asserts an undue hardship, state Medicaid agencies must approve or deny the application within a reasonable time and must inform the applicant that he or she has the right to appeal the decision, and provide a process by which this can be done. In addition, the applicant must be told that application of the penalty period can be halted if undue hardship exists.
Continuing Care Retirement Communities
The DRA now expressly allows continuing care retirement communities (CCRCs) to require residents to spend down their declared resources before applying for Medicaid. However, the spend-down requirements must still take into account the income needs of the Medicaid applicant's spouse. The DRA also requires that three conditions be met before a CCRC entrance fee can be considered an available resource of someone applying for Medicaid coverage of nursing home care. The entrance fee must be able to be used to pay for the individual’s care, the fee or any remaining portion must be refundable on the institutionalized individual’s death or on termination of the admission contract when the individual leaves the CCRC, and the fee must not grant the individual an ownership interest in the CCRC.
The Deficit Reduction Act of 2005 that became effective on February 8, 2006, significantly impacted the ability of individuals to plan for becoming Medicaid eligible for long term nursing home care. Persons should remember that any assets to be gifted away should be done a minimum of five years from the potential entry into a nursing home or else the gift could result in a penalty period during which the nursing home care would have to be from the private funds of the patient prior to becoming eligible for Medicaid.
Why Plan Your Estate?
Humans, unlike any other species, have the knowledge that we will eventually die. While no one likes to dwell on the prospect of his or her own death, it is important to plan for you eventual death for economic as well as the purpose of insuring that your desires in regard to the distribution of your property following your death are carried out. If you postpone planning for your demise until it is too late, you run the risk that your intended beneficiaries -- those you love the most -- may not receive what you would want them to receive whether due to extra administration costs, unnecessary taxes or squabbling among your heirs.
These are reasons why estate planning is so important, no matter how small your estate may be. Estate planning allows you, while you are still living, to ensure that your property will go to the people you want, in the way you want, and when you want. It permits you or those charged with the eventual administration of your estate to save as much as possible on taxes, court costs and attorneys' fees; and it affords the comfort that your loved ones can mourn your loss without being simultaneously burdened with unnecessary red tape and financial confusion, all of which are common problems which occur when at least a minimum estate plan is not put in place prior to death. Estate planning is especially important in this age of blended families from multiple marriages because of the possibility that a persons stepchildren or a spouse’s subsequent spouse may eventually end up inheriting a persons assets despite their actual intent to leave a significant portion of their life’s bounty to their biological children.
All persons should have an estate plan that includes, at a minimum, two important estate planning instruments: a durable power of attorney and a will. The first is for managing your property during your life, in case you are ever unable to do so yourself. The second, a will, is for the management and distribution of your property after death. In addition, more and more, Americans also are using revocable (or "living") trusts to avoid probate and to manage their estates both during their lives and after they're gone.
Persons wishing to create a will should not succumb to the temptation to buy estate planning software for a will or download one from the internet. Tennessee, like most states, has very specific laws that govern what constitutes a valid will and how one is to be executed. Some of these software programs and internet downloads fall short of meeting the requirements of the law, and furthermore even if valid written, if the will is not properly executed the will might be held not to be valid thus leaving the estate to be administered under the law of intestate succession (without a will) for the particular state.
To insure that you have a valid estate plan, consult an attorney experienced in estate planning.