The foundation of most Georgia estate plans is a Will. Your Will is the legal document that dictates how your probate assets are distributed upon your death. But what are your probate assets? The easiest way to answer this question is to first define non-probate assets.
We have all seen the headlines about Bobbi Kristina Brown, the daughter of the illustrious Whitney Houston, and her tragic death. After being found unconscious in the bathtub of her Roswell, Georgia townhome, she was admitted to the hospital and placed in a medically induced coma for months before being transferred to hospice and subsequently passing away. Her death is tragic for many reasons: her young age, the eerie similarities between her death and her mother’s, the allegations of domestic abuse, and the immediate fight among family members to gain control over her care and her assets. With proper estate planning, at least the last tragedy would have been avoided.
One estate planning nuance is “beneficiary designation assets.” These are assets that are distributed at death to the person named on a beneficiary designation form, and do not follow the direction of the will. These assets may be life insurance, joint or pay-on-death bank accounts, joint or pay-on-death investment accounts and retirement accounts. During the initial meeting, it is important to discuss the client’s assets and these accounts in particular. If family dynamic has changed, be it from a divorce, death in the family or simply the fact that once small children are now adults, these beneficiary designations may need to be updated. These assets pass outside of probate. Essentially when the account holder dies, upon confirmation of death, the entity which holds the account simply distributes the assets to the named beneficiary.
Retirement accounts (IRAs, 401k plans and the like) are special, however, because they typically allow beneficiaries to prolong withdrawal if properly handled. If the plan allows, beneficiaries may elect to use their own life expectancy in calculating the minimum amount of money which must be distributed each year (this is also called “minimum required distributions”). This is beneficial because it allows a beneficiary to prolong to amount of time the money is in the retirement account, allowing additional potentially tax free growth.
While many individuals choose to leave their retirement accounts to an individual beneficiary, i.e. their spouse or children, there may be good reason to leave such assets in trust. Trusts offer many benefits, including asset protection, especially with the recent Supreme Court decision in Clark v. Rameker, 134 S. Ct. 2242 (2014), in which the Court found that a non-spouse beneficiary’s inherited IRA was not exempt from the beneficiary’s creditors in his bankruptcy estate.
In order to fully take advantage of both the protection a trust offers and the beneficiary’s life expectancy, the trust must be carefully drafted. Such trusts are referred to as “see-through” trusts because the language directs the retirement plan to look through the trust at the beneficiary individually to determine life expectancy. If the trust runs afoul of the rules, however, the consequences are harsh. The trust and its beneficiary’s life expectancy are disregarded and the “5-year rule” applies, requiring a full distribution of the retirement plan assets within 5 year.
This is one of the many reasons it is important to have an attorney who is familiar with these rules to assist you with carefully drafting your estate plan. We would be happy to work with you and your family to craft an estate plan which achieves your goals.
Genworth, an insurance company that sells long-term care insurance, recently concluded their annual report surveying over 15,000 assisted living facilities, nursing homes and other long-term providers across the country. The report found that the median cost for a private nursing home room has risen from $87,600 in 2014 to just over $91,000 per year. While costs vary widely from state to state, the cost of care in a nursing home has risen at twice the rate of U.S. inflation in the past 5 years.
Much of the aging population believes that Medicare will cover these expenses. Not so. “Medicare does not pay the largest part of long-term care services or personal care – such as help with bathing, or for supervision often called custodial care.” Medicare will pay for a “short stay” if the stay is following a hospital stay of at least three days, the individual is admitted to a Medicare-certified nursing facility and the individual requires “skilled care,” as in physical therapy or nursing services (up to 100 days, although Medicare will only pay 100% for the first 20 days, then the individual must pay a co-pay, currently $157.50 per day). Medicare will not cover long-term care when an individual is suffering from memory impairment or a degenerative disease that impairs the individual’s ability to care for themselves, i.e. bathe, get in and out of bed, etc. Medicare will pay for hospice care, only if one is expected to live less than 6 months—if you have a prospect of a year, you’re on your own. The bottom line is Medicare is not going to cover long-term care in a facility, nor will they cover around-the-clock care at home.
So where do you turn? Long-term care insurance. The difficulty with this is the expensive premiums if you wait too long. The policies can cost upwards of $3,000 per year but max out at a total benefit of $164,000 with a daily benefit allowance of $150 for 3 years. This can help offset the Medicare premium following a hospital stay.
In the event long-term care insurance maxes out, the final option in long-term care is Medicaid. It’s estimated that Medicaid pays for more than half of long-term care throughout the country. However, you must be eligible for Medicaid in order to qualify for assistance, which, in addition to other requirements, has a “resource limit” of $2,000 (although homes are exempt from this calculation). This has led to many elderly individuals depleting hundreds of thousands of dollars in a few short years in order to cover the expense. Then, when they are down to their last $2,000, Medicaid will assist them. These now impoverished individuals have no means for additional necessities aside from what the government offers through social security, disability, Medicaid, food stamps and other state government programs. Additionally, Medicaid will seek reimbursement from the individual’s estate after their death, including their home, in some instances.
This is one of the many reasons proper, and early, estate planning is so crucial. With proper planning, an aging client can align assets in the event of an illness or hospitalization ensuring that:
(1) They will have someone they trust making decisions for them, their previously designated health care agent;
(2) They will have the proper long-term care insurance to assist in covering the cost of long-term care, in the event it’s necessary; and
(3) They will have safeguards in place so that if they require Medicaid assistance, depleting all of their resources is not required.
However, in order for the estate plan to be effective, it must be structured early and prior to the onset of illness. Each family has different goals which they hope to accomplish. We can work with you to set up the most effective estate plan to accomplish you and your family’s goals.