may03

While I like the flexibility and probate-avoidance that a living trust brings, there are some assets that we recommend not putting in the name of a living trust. The following assets stay out of the living trust:

Car. A car can always be transferred by affidavit through the secretary of state without a probate. You can put your car in the living trust, but it takes almost 8 weeks for a new title to be issued from secretary of state and you must give the buyer of the car a copy of your trust when you sell the car (an invasion of privacy that most clients don’t like.)
Day-to-day bank account—Social Security payments are deposited here (we don’t want to mess with that!) Also there is a little-known rule regarding Medicaid and gifts made from a living trust (or from any trust). This would apply if you give your children or grandchildren gifts by check from a checking account titled in the name of your living trust or if you gave real estate (titled in a living trust) to your children or grandchildren. Gifts from a trust –even a checking account titled under a living trust—have a longer look-back period for Medicaid than gifts made from an individuals. There is a 60-month look back period for trusts and a 36 month look back for individuals. It’s rare that this would be a problem, but it’s another reason, to leave the checking account in your own name (or in joint tenancy with a spouse or child).
IRA- The IRA itself is not transferred to trust, however, the trust can and sometimes should be the beneficiary of the IRA on the IRA owner’s death. (See May 02 newsletter for more on this www.lawsam.com/may2002.htm
It is not possible to make the living trust the owner of an IRA. The IRA must remain in the client’s own name.
Small accounts under $50,000- Often there are a few bank accounts, or individual stocks, that are difficult to transfer to the living trust. It is okay to leave them in joint tenancy or an individual name as long as the accounts total less than $50,000.00. No probate is needed if the assets are less than $50,000. A small estate affidavit is used to transfer assets without going to court.

Is it legal to give away money?

How the 36 month transfer penalty works for Medicaid

A client called recently and said her 73- year- old mother, who lived with my client and who had Alzheimer’s disease, fell down, broke her hip and ended up in the hospital. Medicare stopped paying after 20 days because her mom was not “improving.” A mini-crisis was born and quick decisions had to be made on where her mom would live—back at home with my client or in a nursing facility.

Due to the Alzheimer’s disease progression and the lack of mobility from the broken hip, she now had to consider moving her mom to a nursing home and she was trying to figure out if her Mom would qualify for Medicaid. My client said her mom had few assets; just a car, a small checking account, and ah, well, there’s one other thing, she told me. She hedged a little and explained that her Mom gave her $30,000.00 to “hold” more than two years ago.

My client’s question was: Does her mom qualify for Medicaid even though she gave her daughter a “gift” of $30,000.00? The answer was, yes.

What the law allows

Medicaid allows you to make gifts. When you apply for Medicaid for long-term nursing care the state of Illinois looks back 36 months to check for transfers “without consideration,” in other words, giving things away to family or friends. The state will examine the last three years of bank account statements for transfers greater than $500.00. It is not illegal to make gifts. If gifts are made, the state imposes a “waiting period” before Medicaid benefits begin.

Gifts create a “waiting period”

Many clients think that any gift makes them automatically ineligible for Medicaid benefits for 36 months beginning on the date of the Medicaid application. This is not true. The “waiting period” starts on the date the gift is made (not on the date you apply for Medicaid.) The waiting period is calculated by taking the amount transferred divided by the least expensive “private pay” rate (not the Medicaid reimbursement rate to the nursing home) in the private facility where the person is living. So, if $50,000.00 was given away and the private pay rate was $5000 per month, the client is ineligible for 10 months, beginning on the first month the transfer was made.

So in the case of my client’s Mom, who transferred $30,000.00, the waiting period was only 6 months ($30,000.00- divided by $5000—the monthly cost of care). Because she transferred the money more about two years ago, her Medicaid application will be approved because the waiting period started on the date the gift was made and expired 6 months later, a long time ago.

Watch out for large gifts

The problem in gifting situations is with large gifts (not no much with the large gift but the timing of the Medicaid application). I would define a large gift as one over $100,000.00. When large gifts are made, it is critical to watch the date that a Medicaid application is made. Applying for Medicaid even one day before the 36-month waiting period expires can be tragic. For example, say Mom signs a deed to her son and daughter to her Palatine house worth $300,0000 on January 1, 2003. (At a private pay rate of $5000 per month she must wait 60 months to qualify for Medicaid benefits) Signing the deed triggers the “waiting period.” If she does not need nursing care for 36 months, and applies for Medicaid on January 2, 2006, the entire $300,000 will be ignored and she will qualify for Medicaid. The date of application for Medicaid is the key here. If the gift giver applied for Medicaid too early - even one day prior to the 36 months expiring - she will be denied benefits until the full 60 months have elapsed. So if she applies for Medicaid on December 31, 2005, she has not waited 36 months and the penalty will extend the full 60 months.

(In fact, a client could gift $1 million or $80 million to her children, wait 36 months and then apply for Medicaid the day after the 36 months expires and she would qualify! I am not endorsing this or suggesting anyone should do this—just explaining the rule.)

The key is this: There is no maximum penalty period, but the waiting period can be shorter than 36 months. Confused yet? Don’t feel bad; everyone is.

Before making any transfers or gifts:

Please consult an elder law attorney.
Sign a Medicaid power of attorney. This is a specially drafted power of attorney that authorizes making gifts, severing joint tenancies and creating trusts.

Easy Steps in Getting a By Owner Home Purchase Done

More and more clients are buying homes by owner and without a real estate agent. The internet has a wealth of information and has fueled this trend. Many buyers are all little mystified about exactly what steps need to be taken to complete the sale. The steps that a Buyer should take are outlined below:

Before you start looking:

Get a pre-approval letter from a mortgage broker. Sellers will feel more comfortable dealing with you if you can show that you have discussed your financing with a mortgage broker and that you will probably qualify for financing. If you talk with a mortgage broker before going to contract you will not have to search for one after the contract is signed. Most first time buyers put 5% down. Many get gifts from relatives. If you discuss this in advance with the lender there will be fewer surprises later. Generally no more than 28% of your gross monthly income should go to your mortgage payment and no more than 36% to your mortgage payment and other debts, like car payments and credit card debt. You will know the approximate closing costs and other fees before your forge ahead and find a property to buy.
Have a home inspector in mind. In the summer many inspectors are busy and you can call 3 or 4 until you find one that can make meet your time deadline for the inspection. Having one in mind in advance will help in scheduling the inspection.

Start looking:

Find a home. This is the easy part (hopefully). Yard signs, the newspaper and web sites like www.dailyherald.com, www.chicagotribune.com and www.realtor.com have most of the current listings. Until recently, the MAP and MLSNI databases, that real estate agents use, were not accessible to the public. Now some real estate agents are making it accessible through their web sites but you must first register.

Determine the Purchase price you want to offer. Recent sale data is available on the Chicago Tribune website. Only sales within the last year are taken into account by appraisers. Many internet users can find comparable sales by looking up the street names of nearby streets for properties that closed in the last year. As a service to my by-owner clients, I can check the recent sales thru the MAP and MLSNI databases and help determine a reasonable offering price. Buyers tend to just lop 5% off of the asking price (the standard commission) and offer that amount. Most sellers will compromise on the price, but not that much.

Going to contract:

Make an offer to purchase either verbally or in writing. This can be a little messy and it can take one day or up to 7 days to get the contract signed. Most clients find that it works best to first make a verbal offer (which is not binding on either party) and then draw up a contract. It is a requirement that real estate contracts be in writing). The contract is usually prepared by the Buyer’s attorney. I do not suggest jotting down a few notes on a piece of paper and having both parties sign it. That is a contract and you may be stuck with it.
The Buyer signs the contract first. It works best for the Buyer to bring contract to seller. The Buyer usually wants to see the house again and bringing the seller the contract will speed up the process. The contract can be faxed to seller. Fax signatures are as good as originals.
The Seller signs the contract after the Buyer and then the contract is final. The Seller gives buyer real estate disclosure forms and the Buyer signs the disclosures.
Buyer hires home inspector and does an inspection within 5 business days of the seller signing the contract.
The Buyer applies for mortgage. Always get a “good faith estimate” at application showing the closing costs. The interest rate should be locked in at application for 60 days—don’t float the rate.
The appraiser, hired by the mortgage company, goes to house.
The Buyer’s attorney asks for written extension(s) of the mortgage contingency until the loan is approved. Most closings have at least one extension. This is needed to preserve the Buyers right to have the earnest money refunded if the loan is not approved for some reason.
Once loan is approved, closing is scheduled between 9 and 4 weekdays.
The Buyer brings a cashier’s check payable to the Buyer (not anyone else) and insurance policy to closing.
That’s it. You’re done. Hurray. Move in and enjoy.