Medicaid qualification has always been tough.  But seniors have usually been able to protect a few assets for their spouse or children, or to supplement their own care, on their way to getting Medicaid assistance.

Now, though, Illinois has implemented harsh new rules required by the Deficit Reduction Act of 2005 (DRA), a federal law that governs the state Medicaid programs.  These new rules apply to any Medicaid long-term care applications filed in Illinois after January 1, 2012.

If you’re close to retirement age, or have a parent or loved-one close to retirement age, knowing how these new rules work is critically important.

The changes are so big that we’ll need to cover them in several parts.  This first part deals with two concepts that our clients usually encounter first when researching Medicaid — ”look back” and “penalty periods“.  The rules for both have changed dramatically.  And the changes could cost unprepared Illinois seniors tens of thousands of dollars in lost Medicaid long-term care benefits.

5-Year Disclosure Period (“Look Back”)

The old Medicaid rules required applications to be filed with three years of the applicant’s financial history, including bank records, tax returns, and information about sales or gifts of assets.  Anything that occurred more than three years prior to filing did not have to be disclosed for the most part.

Applications filed on January 1, 2012 or later must include five years of financial history.  That’s a big change (66% more), and when combined with the penalty period changes below, it makes planning for Medicaid much more complicated than under the old rules.

Penalty Periods

The primary purpose behind reviewing five years of financial history is to determine whether the applicant made any disallowed transfers.   Gifts, of course, are considered transfers.  But so are many other things that people often do, such as reimbursing family members for groceries or paying them for helping around the house.

When disallowed transfers are found, a penalty period is imposed.  While under a penalty, a senior is denied Medicaid benefits — even though they might otherwise qualify.  The senior must find another way to pay for the care until the penalty is over.  That can be difficult when the assets gifted or transfered can’t be recovered.

The new Medicaid rules made significant changes to the way penalty periods are calculated and applied.

Transfers Accumulated

The old rules treated every month with a disallowed transfer independently.  So the penalty for a $6,000 transfer in January was separate from the penalty for a $500 transfer in February.  This generally worked out in favor of the senior because of how the other penalty rules worked.  Small transfers spread among many months often didn’t even create a penalty at all.

Under the new rules, all disallowed transfers from the past five years are added together to calculate the penalty.  So very small transfers (even just a few hundred dollars) — if they are made regularly — can result in a huge penalty when added together.

No Rounding of Penalties

The length of the penalty period for a disallowed transfer is equal to the value of the transfer divided by the monthly private pay rate for the nursing home the senior resides in at the time of the application.  For example, a $9,000 transfer with a private pay rate of $5,000 results in a 1.8 month penalty.

The one month penalty is pretty easy to understand.  But happens to that fractional 0.8 months?

Penalties under the old Medicaid rules were calculated in whole months.  And fractional months weren’t rounded using the rules we were all taught in grammar school (round up 0.5 and above and round down anything lower).  Instead, fractions were simply dropped.  So a 1.8 month (or 1.9 month) penalty was applied as a 1.0 month penalty.

This obviously left open up all sorts of doors for creative asset protection.  But those doors have now been closed.

Fractions are no longer rounded down.  Penalties are calculated and applied to the half of a day.  A penalty of 1.8 months will be applied as a 1 month and 24 day penalty.

Penalty Periods Applied After Qualification

Applications under the old rules were often simplified by the fact that penalties were applied in the month of the transfer.

Imagine that a $15,000 transfer was made 24 months before applying and that the nursing home private pay rate is $5,000 per month.

• Under the old rules, a three month penalty would have been applied beginning in the month of the transfer.  That means the penalty ended 21 months ago — in other words, long before Medicaid coverage was actually needed!
• Under the new rules, the penalty starts only after the senior applies for Medicaid and meets all of the other qualification requirements.

As you can see, even fairly large transfers made many months (or years) before applying weren’t likely to cause problems under the old Medicaid rules.

Combining the Penalty Period Rules — An Example

Taken individually, the changes to penalty periods sound quite harsh.  But you really need to see an example to fully understand just how much the new rules will affect seniors.

Mary has been in good health and financially secure for years.  And she has been generous with her money.  Every year at Christmas, Mary gives $100 to each of her seven grandchildren.  A couple of years ago, Mary also gave $4,500 to her daughter, Susan, to help Susan through a period of prolonged unemployment.

Recently, though, Mary’s health has declined and she is now residing in a nursing home that costs $5,000 per month.  The rest of Mary’s assets have been spent, and she is now looking to Medicaid for her long-term care needs.

Everything Mary did is what many other grandparents would do — and have done — in the same situations.  But the Department of Healthcare and Family Services won’t look at what Mary did in the same light.

Under the new Medicaid rules, Mary made $700 worth of disallowed transfers each year (the Christmas gifts) plus a single disallowed transfer of $4,500 (the gift to Susan).  Adding up five years worth of transfers (remember, there is now a five year look back period) brings the total to $8,000.

The Department of Healthcare and Family Services will apply a 1.6 month penalty to Mary ($8,000 in transfers divided by the $5,000 private pay rate).  Mary’s nursing home will be looking to someone else to pay for Mary’s care during the penalty period.

What it All Means for Your Family

The new Medicaid rules have been described by some as “harsh”.  But that may be an understatement.  Completely ordinary behavior will now be penalized.  As a result, it is imperative that Illinois seniors suffering from declining health get counsel from an elder law attorney to make sure that they aren’t damaging their Medicaid eligibility.

Tenancy by the Entirety

The first major change of 2011 provided new options to married couples in how they own their home.  Tenancy by the entirety was a special protection available for the marital residence.

Normally, a person’s house is completely exposed to their creditors apart from a $15,000 homestead exemption.  But married couples can own their primary residence (and only their primary residence) in tenancy by the entirety.

Tenancy by the entirety works the same as joint tenancy, meaning that when one spouse dies the other spouse inherits the entire property.  But it also adds some major creditor protection.  A home held in tenancy by the entirety can’t be lost to creditors of only one spouse.

Of course, creditors try to find a reason (any reason!) to drag the other spouse into the picture.  Even so, it’s a very strong protection.

Prior to 2011, tenancy by the entirety was only available to married couples who owned their homes directly or via a land trust.  Owning a home directly exposes the home to probate.  Land trusts were a common solution to the probate problem, but that usually meant paying annual fees to a bank to maintain the land trust.

Starting January 1, 2011, tenancy by the entirety protection became available to couples who want to own their home in a traditional revocable living trust.  It’s not automatic and it does not apply to people who transferred their home into their trust prior to January 1, 2011.  The trust and the deed need to be drafted with tenancy by the entirety in mind.

The new statute provides a useful alternative for married couples who want to: (1) hold their home in tenancy by the entirety; (2) keep their estates out of probate; and (3) avoid paying a bank for an expensive land trust.

Civil Union Act

On June 1, 2011, the Illinois Religious Freedom Protection and Civil Union Act went into effect.  That law made Illinois just the sixth state in the nation to recognize civil unions for same-sex couples. Civil union partners have the right to be treated as a spouse under the Probate Act.  They can also hold their primary residence in tenancy by the entirety (previously granted only to married couples—singles and same-sex couples were out of luck!).

While the Civil Union Act provides certain safeguards, its benefits don’t extend to every aspect of estate planning.  And at best, it means that same-sex couples get the same bad “default” Illinois estate plan as traditional married couples.  So it is important for same-sex couples to have a comprehensive estate plan that addresses their property and health care.

To 2012…and Beyond!

Those are the major stories from 2011.  There’s more to come for 2012, and we’ll be sharing it with you as it happens.  We look forward to a great year of serving you!

A new version of the Illinois Power of Attorney Act went into effect July 1, 2011.  The law changed the rules and statutory form for the Power of Attorney for Property and the Power of Attorney for Health Care.

No doubt, you are probably thinking, “what happens to the powers of attorney I signed 1 (or 2, 5, 10) years ago?”  Don’t worry.  If you have existing powers of attorney, you are not required to rush out tomorrow and sign new ones.

Of course, if they’re more than a few years old, you may still want to get them updated.  Banks sometimes question outdated powers of attorney (those more than 3 years old).  And if you’re over the age of 55, you’ll definitely want to consider a power of attorney with long-term care and elder law provisions (the statutory form which most people have does not address these issues).

While there are many technical changes to the Power of Attorney for Property, the most noticeable change is the ability to name multiple people to act as your agents simultaneously under a Power of Attorney for Property.  Your panel of agents can then act on your behalf by majority vote if you become incapacitated.

The new Power of Attorney for Health Care also provides broader access by your agents to your health care information if they need to act under the power of attorney.  These changes were made necessary by the HIPAA privacy rules that were published in August, 2002.  If you have a separate HIPAA authorization as part of your estate plan (and you do if we drafted your plan), you may not need to update your Power of Attorney for Health Care.

From a legal standpoint, I would describe the changes as a “solid upgrade”.  Something to be aware of, but not likely creating any need for action on your part—unless you were sorely lacking in the power of attorney department to begin with!

In Part 2, we’ll fill you in on the rest of the changes from 2011 and look ahead at what to expect in 2012.

The Illinois estate tax rules have caught many people by surprise.  So much attention has been paid to the federal estate tax (which currently has a $5 million exemption) that many have forgotten that Illinois has an estate tax too.

Under the 2009 and 2011 Illinois estate tax rules (there was no Illinois estate tax in 2010), a person dying with an estate of $2.5 million would owe no federal taxes.  But their estate would have to write a $128,518 check to the Illinois Department of Revenue.  That big number often shocks people who think of their estates as “just a little bit over the $2.0 million limit.”

Good news arrived last week, though, for Illinois families.  On December 20, Governor Quinn signed a law raising the estate tax exclusion (the minimum estate size before Illinois estate taxes are due) from $2.0 million (currently) to $3.5 million for 2012 and $4.0 million for 2013 and beyond.

Too many times this year I’ve had clients ask whether they should consider moving to another state to avoid Illinois estate taxes.  By narrowing the gap between the Illinois and federal estate tax rules, fewer families will need to consider advanced planning techniques.

But…the good news from Illinois is tempered by the uncertainty behind the federal estate tax rules that is still hanging over everyone’s heads.  The federal estate tax exemption for 2012 is currently $5.0 million, but it drops back down to $1.0 million for 2013 and beyond.  Several proposals have been made in Congress for a permanent solution.  So stay tuned!

Our choice to use Macs was about more than just what software our computers were using.  It impacts how we do everything that we do.

In an interview with Business Week in May, 1998, Steve explained his philosophy:

“That’s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

And during an interview with Fortune magazine in 2000, Steve said:

“We don’t have good language to talk about this kind of thing,” Mr. Jobs replied. “In most people’s vocabularies, design means veneer. It’s interior decorating. It’s the fabric of the curtains and the sofa. But to me, nothing could be further from the meaning of design. Design is the fundamental soul of a man-made creation that ends up expressing itself in successive outer layers of the product or service. The iMac is not just the color or translucence or the shape of the shell. The essence of the iMac is to be the finest possible consumer computer in which each element plays together. … That is the furthest thing from veneer. It was at the core of the product the day we started. This is what customers pay us for — to sweat all these details so it’s easy and pleasant for them to use our computers. We’re supposed to be really good at this. That doesn’t mean we don’t listen to customers, but it’s hard for them to tell you what they want when they’ve never seen anything remotely like it.”

We have tried to bring that same sense of design to our practice.  Real design that makes things simpler and more understandable—not just decoration.  To “Think Different”.

The feedback we have received from our clients suggests we have been quite successful in that.

But we know that we have only scratched the surface.  And we say thanks to Steve Jobs for showing us just how deep that hole goes.

With the increase in life expectancies and rise in disabling conditions like Alzheimer’s disease, extended stays in long-term care facilities are more and more common.  And the result is thousands of seniors and their families facing what are often crippling long-term care bills.  What is so sad is that many families don’t know that help is available from Medicaid.

The Medicaid eligibility rules are tough, but it is not something you should think of as “only for the poor.”  Seniors frequently qualify for Medicaid while protecting thousands of dollars in assets for themselves, their spouses, or their families.  Smart planning makes all the difference because it helps pay for many “extras” that Medicaid and Medicare do not cover.  I am passionate about helping families escape from that feeling of hopelessness every time the long-term care bill comes.

The rules HFS announced are not the final rules.  There is still a period for public comment and changes.  But they do give us an inside look into the direction Illinois is heading with its implementation of the DRA guidelines.

There are a few important things to take away from the proposed rules:

• Crisis planning to protect assets and qualify for Medicaid will still be possible
• Advance Medicaid planning will become even more valuable to protect your hard-earned assets (best for people who are completely healthy but looking forward 6-10 years)
• Medicaid will be giving additional asset protection advantages to people who have long-term care insurance in place, making the insurance doubly useful (but it has to be the right kind of policy, not just any old policy will do!)

As the rules move through the process, I will keep you updated about any developments.  But consider this your “heads up” that changes are on the way!

The good news is that there’s still time to get an application in under the current Medicaid rules.  So if you know anyone who is in a long-term care facility or think may need assistance soon, tell them to call my office.  We may be able to help.

Let me start by saying that I am one of those moms who is very strict about sunscreen.  My kids do not go swimming or play outside for very long without a healthy coat of sunscreen.

But Jeff and I found ourselves on the beach on a very overcast day.  I know that clouds don’t prevent sunburns.  But we were also sitting under one of these:

…our very own tiki hut.  The thought of sunscreen entered my mind, but quickly left because we were “safe” under the tiki hut.

So there we sat — in the “shade” on a cloudy day — and read our legal books for hours and hours.  How did our little beach adventure turn out?

Sunburn.  Lots of it.  Jeff got the worst of it because he is very fair skinned.  But I didn’t escape scot free.

The tiki hut gave us a huge false sense of security.  We felt incredibly safe because we had taken some steps, even though they weren’t enough.  In a sense, the cloudy skies and tiki hut prevented us from taking the truly effective steps that we needed to take to protect ourselves.

I run into the same thing all the time when talking to people about their estate plans.

• The people who told me they got a Will to avoid probate (but a Will actually guarantees probate)
• The parents who were very proud that they named guardians in their Will (but had done nothing to address who would care for their kids on short notice or if they were injured but not killed)
• The adult children who took money from their elderly parent’s accounts to reimburse expenses they had incurred (but they hadn’t kept proper records so their parent’s eligibility for Medicaid long-term care coverage was put in danger)
• The people who tell me their estates won’t have to pay estate taxes (but they didn’t include the value of their life insurance policies when they added up their estate)
• And many other stories we hear…

Each of these people felt a false sense of security because they hadn’t been properly educated by their attorney (or had gotten documents without seeing an attorney at all, such as from Legal Zoom).  We are strong believers in education because good decisions are only possible by having the full picture.  That’s why we became National Preparedness Coalition Members.

If Jeff and I had the full picture, we wouldn’t have had to stay inside for three straight days of our “beach vacation” because of a serious sunburn.  But the stakes are much bigger in estate planning.

So, get a head start on National Preparedness Month.  Ask yourself, have you fully investigated what you need to do to protect yourself and your family?  Or are you living under a false sense of security?  If you have any questions about your plan, call me and let’s talk about it.

But don’t just think about your own family.  If you believe someone you know — a friend or family member — has a false sense of security, take the initiative to send them this email.  Tell them to get prepared — and get their plan checked out.

Or your spouse runs a business, and the bank required them to personally guarantee a loan.  Now, the business isn’t doing so well, and the bank is asking about other ways your spouse might come up with the money.  Is your home safe?

Or perhaps your spouse gets into trouble with their credit card spending, and bankruptcy seems like the only option for them.  You’re making enough to pay the monthly bills, including your mortgage.  But can the credit card companies really make you sell your home to cover your spouses charges?

In Illinois, the answer to both questions might be no … if you own your home as “tenants by the entirety.”

Don’t let the complicated name scare you off (and let’s just call it “entirety protection” to keep it simple).  Entirety protection is a really important protection for married couples, and one that is overlooked by many estate planning attorneys.

You don’t get entirety protection automatically.  But a new law signed last week by Governor Quinn makes it much easier to use a living trust and keep entirety protection for your home.

Why is entirety protection so important?  Well, it protects your home from claims made against either you or your spouse (but not from claims made against you both).  Without entirety protection, a creditor of your spouse could place a lien on your home and might even force you to sell your home to pay off the debt or claim.

Until now, there have been only two ways to get entirety protection:

1. Own your home together with your spouse, where the deed includes the words “tenancy by the entirety” or “tenants by the entireties”
2. Own your home in a land trust, where you and your spouse are the beneficiaries

But the new law allows for a third way to get entirety protection—using a traditional living trust.

The keys to entirety protection under the new law are a properly structured deed and living trust (or trusts, if you and your spouse each have your own trust).

If you already have a land trust, that’s great!  As long as your land trust states that your home is held in “tenancy by the entirety,” you don’t need to do anything.  The new law doesn’t change anything for you.

But if you’re not sure how your home is owned or whether it has entirety protection, I can tell you by taking a look at your deed and living trust or land trust.  There’s no fee for this service.  It’s my gift to you to make sure you don’t miss out on this invaluable protection for your home.

As always, I am here to help you and educate you — bringing you the latest developments in the law that affect your family.

Saying that Evan is local is an understatement.  He is not only from Naperville, but he is from our neighborhood.  He went to the same elementary school and middle school as our children now attend (and he went to the high school our children will go to, but I am really trying not to think about high school yet).

Last week we began wondering how much the stars got paid to appear on the show.  I had heard rumors that some of the stars (such as this season’s Pamela Anderson) went on the show primarily to make money.  So the obvious question was, “how much?”

Well, it wasn’t even ten minutes later and Jeff had found the answer.  During Season 8, the stars earned $125,000 just for appearing on the show.  The stars could also earn up to $240,000 more by making it to the finals.  And what about winning the whole competition?  The only reward for that appears to be the mirrored ball trophy.

How do we know all of these details?  Usually reality TV shows include a pretty tight non-disclosure agreement forbidding the participants from talking about the show and their contract.  That’s why we don’t hear much about how shows like Survivor and The Bachelor are actually produced.

But Season 8 on Dancing With The Stars was different because Olympic gymnast Shawn Johnson was one of the stars.  What made Shawn different from previous competitors is that she was a minor (she was 17 when she competed, having just turned 18 in January).

Shawn’s contract with Dancing With The Stars had to be approved by a judge because minors don’t have the same ability to enter into contracts as adults.  And the second that contract was filed with the court, it became a public record.

It’s the same deal with probate.  Far from avoiding probate, having a will actually guarantees probate (with the exception of some estates under $100,000).  Your will and a complete accounting of your assets will become part of the public record.

Now, it’s unlikely that reporters from TMZ are going to be digging through your court records after you pass away like they have done with Michael Jackson’s estate.  But you may have your own reasons for wanting to keep your family, friends, and neighbors from learning the details of your assets and what gifts you made.

That’s just one of the reasons why more and more people are turning to living trusts for their estate plans:  trusts are private.

If you have only a will, I encourage you to investigate the benefits offered by a living trust.

In the meantime, don’t forget to vote for Evan on Dancing With The Stars!

But more than just your house needs maintenance.  You would be well advised to review your estate plan at the same time.

Many of your assets are controlled by beneficiary forms.  Typically, these will be your retirement accounts (such as IRAs, 401(a), 401(k), and 403(b) accounts), life insurance policies, and any other accounts you have with a transfer on death (TOD) or payable on death (POD) designation.

When your beneficiary forms don’t keep up with changes in your life, it can cost you — and the people you love — lots of money.

Have you, or someone you know, gone through any of these major life changes since you last checked your beneficiary forms:

• Gotten married
• Gotten divorced
• Had a child
• Lost a husband or wife

Many people automatically think to update their estate plan when they have one of these major life events.  But the beneficiary forms often slip through the cracks.

I have read several stories in the news recently about money from a retirement account or life insurance policy going to the wrong people because beneficiary forms weren’t updated.

• If you have gotten divorced, is your ex-wife or ex-husband still the beneficiary of your life insurance?
• If you have gotten married, are your parents or siblings still the beneficiaries on your accounts?

It can be tough to predict what life changes will make you rethink your beneficiary forms.  So put it on your calendar.  Every year, get a copy of all of your beneficiary designations and make sure they reflect the life you now lead.