Common Mistakes People Make When Attempting to Avoid Probate

1. Transferring the home to a family member.

Often, people ask us about putting other family members’ names on the title to their house in an effort to avoid probate. The most common type of deed that people use is a “quit claim” deed that names another family member as a joint tenant with rights of survivorship.

This designation gives the new joint tenant an immediate right to reside in or otherwise excess and use the house. Upon the death of the original owner, the surviving tenant only needs to file paperwork proving that the death occurred to remove the deceased’s name from the title. This can also be done by using a life-estate deed under which the original owner reserves the right to live in the home for the remainder of his or her life and then upon death the property belongs to the designated family members.

Although these techniques avoid probate, they can cause many unforeseen problems. These problems include 1) a gift for federal income tax purposes which is often unreported and can accrue interest and penalties for years; 2) loss of the stepped up basis the recipient would receive upon the death of the original owner; 3) the inability to sell or refinance the property without the consent of all owners; and 4) the creation of a disqualifying transfer for Medicaid qualification. Furthermore, the family member whose name has been placed on the deed can demand that their interest be bought out, thereby forcing the original owner to vacate their home.

2. Transfer on Death Deeds (“Lady Bird” Deeds).

Fortunately, there is a way to avoid probate without incurring all the downsides associated with an immediate transfer to a joint tenant or a life-estate. If a Transfer on Death Deed, (also known also known as a “Testamentary Deed” or “Lady Bird” Deed, or in some states an “Enhanced Life Estate Deed”) is used, the problems will not occur. The transfer on death deed is similar to a life-estate deed in that the successor does not take title until after the original owner or life tenant dies.

However, unlike a joint tenancy or life-estate, the life tenant retains the ability to sell, convey, mortgage, or refinance the property without another person’s consent. The life tenant can even revoke the transfer on death deed if they so wish. Moreover, a transfer on death deed avoids probate, maintains the stepped-up basis benefit upon the death of the life tenant, does not create a gift, and is not a disqualifying transfer for Medicaid qualification purposes. It does not, however, protect the property from having a Medicaid lien imposed if the life tenant must rely upon public benefits to pay for long-term care.

Caution must be exercised when executing a transfer on death deed to make sure it is correctly drafted so as not to create problems that will result in the necessity of a probate, for example when a beneficiary pre-deceases the life tenant. Another problem can arise when the title company is not satisfied with the language of the deed and requires a probate in order to issue title insurance. Typically, title insurance is required when a home is sold with a mortgage.

Therefore, you will not be able to sell the home without running it through a probate to clear the title. In addition, if the life tenant or their spouse ever utilized Medicaid to pay for their long-term care, a claim by Medicaid under Wyoming’s Medicaid reimbursement program can require a probate to be opened in order to have a person representative appointed by the court to can deal with the problem. A transfer on death deed is not the type of deed that one should undertake without the advice of a licensed Wyoming lawyer who has dealt with these issues such as Kelly S. Davis.

3. A joint account holder using funds for personal benefit.

Another common technique often used by the elderly to avoid probate is to create jointly owned bank accounts with other family members. For Medicaid planning purposes, all funds in such bank accounts are considered assets of the applicant, regardless of the source of the funds. Often, family members do not keep sufficient records or may use the joint account to pay their own bills which are not the responsibility of the applicant. Medicaid considers such transactions as “gifts” and will disqualify the recipient if they are done within 5 years of making application for benefits. It is possible to undo these transactions, but often the family member who received took the money is unable or unwilling to return it.

By placing another person’s name on the account as a joint tenant, all funds in the account may be considered as belonging to that joint tenant. The death of the original owner does not change that fact. Thus, even if the deceased’s intent was only to avoid probate by trusting the joint tenant to make distribution to the proper heirs, if they refuse to carry out this request and keep the money for themselves, short of litigation there is little that can be done to force them.

Furthermore, putting someone else on the account as a joint tenant makes it subject to the claims of their creditors. They may also become involved in litigation if they go through a divorce. The safer route to avoid the probate of checking accounts is to use a limited powers of attorney and payable on death designation.

4. Making gifts or donations to people, charities, or religious institutions.

One major mistake made by many people who may later apply for Medicaid is the making of gifts or donations to churches or charities. As you age, the chance that you will need Medicaid increases. If you desire to continue to make donations, you must be prepared to repay the money in the event you need Medicaid coverage. There is a solution. You can make gifts conditional that in the event that such gift creates ineligibility for Medicaid coverage, the organization accepting the gift shall return the funds necessary to cure the ineligibility. However, most institutions refuse to accept gifts or donations under these circumstances.

5. Gifting to Grandchildren.

Another problem area with gifts occurs when gifts are given to family members and friends for holidays and birthdays. While there is not a problem in making a gift to a spouse, a gift to a child or grandchild can be a problem. That problem increases with the size of the gift. The cure for the problem may require the cumulative value of the gifts made during the five year period immediately before the Medicaid application is made.

While there is an exemption for gifts not made in anticipation of needing Medicaid, there is also a legal presumption that the purpose of such gifts is top reduce the size of the estate in anticipation of making application for benefits. Overcoming that presumption may require expending funds on legal fees to fight the determination in court and there is often very little hope for success. Often the applicant’s children understand, but it is a difficult concept to explain to the grandchildren.

In these situations, we often recommend that the applicant tell the grandchild’s parent to purchase the gift for the grandchild with his or her own money.

6. Selling assets to family members for less than fair market value.

A common major area of problems with Medicaid eligibility occurs when the applicant has sold or given real or personal property to another for less than fair market value. The difference between the fair market value at the time of the transaction and the amount received is considered a gift and creates a disqualification period. This can happen with a vehicle, home, a piece of land, or other asset owned by the applicant. The solution is to have the person who received the funds reimburse the fair market value of the items prior to the application for coverage being filed or return a portion of the gift each month after the applicant has been denied Medicaid benefits due to the gift.

7. Transferring assets to a Living Trust.

One of the more common but easily correctable mistakes is when the applicant transfers assets to a revocable trust. Often, these transfers are part of normal estate planning. It is important as people age that any estate-planning take into consideration elder law issues and the potential need for Medicaid planning. Since living trusts are revocable, they can be revoked and the assets are returned to the applicants. Unfortunately, by virtue of state and federal law, this revocability causes living trusts to be considered available resources for the purposes of qualifying for Medicaid.

As our family members age, it is important to review and modify our planning techniques based on their individual circumstances. Often, we can accomplish the goals of probate avoidance and Medicaid eligibility with alternative tools and techniques. As the rules for eligibility become more complex it is important to deal with an attorney who is familiar with elder law and estate planning such as Kelly S. Davis.