New Medicaid Penalty Divisor for Gifts is set at $293.25 a day
The Medicaid program is the most significant source of potential government financial assistance for families struggling to meet the cost of long term care.
Qualification for Medicaid long-term care benefits is critical to meeting the care needs of many of Pennsylvania’s most frail elderly. But, an applicant can be ineligible for those benefits if he or she has disposed of assets for less than fair market value during a five year look-back period.
The transfer penalty applies when a transfer was made by the individual applying for Medicaid long-term care benefits, or their spouse, or someone else acting on their behalf.
Unless the transfer is for some reason exempt, if an asset was transferred for less than fair consideration within the look-back period, then a period of ineligibility is imposed based on the uncompensated value of that transfer.
New Penalty Divisor for 2015
The length of the penalty period is calculated by taking the uncompensated value of the transfer and dividing it by the average private patient cost of nursing facility care in Pennsylvania at the time of application for benefits. The average cost to a private patient of nursing facility care is often referred to as the “private pay rate” or the “penalty divisor.”
The penalty divisor is revised each year as nursing facility care costs increase. As of January 1, 2015, the penalty divisor will be set at $293.15 per day. This means that the Department of Human Services (formerly Department of Public Welfare) has calculated that the average monthly nursing facility private pay rate in Pennsylvania is $8,916.65 a month.
Uncompensated transfers made during the look-back period will be calculated at one day of ineligibility for every $293.15 transferred away. In Pennsylvania, transfers penalties will be imposed when the value of transfers made in a month exceeds $500.
The rules are complicated. Seniors considering making gifts or other transfers of assets may want to consult with an experienced elder law attorney before completing the transaction.
PA’s New Law on Powers of Attorney: A Guide for Consumers and their Advisors
Pennsylvania has made dramatic changes to the laws governing financial powers of attorney (POAs). The new rules apply mainly to POAs that you create in order to allow someone else to manage your financial and property matters such as in the event of your future disability or incapacity.
The new law, Act 95 of 2014, is designed to better protect you from potential financial abuse. It is also intended to protect financial institutions and other third parties from liability for accepting a power of attorney that later is determined to have been invalid.
These well-intentioned changes come at a cost to consumers. When the new law takes full effect on January 1, 2015, POAs will be more complicated to prepare, more difficult to get properly executed (two witnesses and a notary are required), and more susceptible to rejection by your bank. And you will need expert help if you want your POA to give your agent authority to protect your assets and qualify you for benefit programs in the event you ever need long-term care at home or in a nursing facility.
Here are some things that consumers and their advisors need to know about the new law.
What is a Power of Attorney?
A Power of Attorney (POA) is a written document in which you (the “principal”) give another person (your “agent”) the authority to act on your behalf for the purposes you spell out in the document. Most POAs are “durable” meaning they continue to operate and are legally valid even after you become disabled or incapacitated.
Why is it Important to have a Power of Attorney?
A POA gives you better control over your future. With a POA you decide who will be authorized to act for you in the event an accident or illness, and you define the powers and authority that person will have. If you have a family, your POA can help prevent family disputes and allow your agent to meet your family’s needs during the time you are incapacitated.
If you do not have a POA and become unable to manage your financial affairs, it may become necessary for a court to appoint someone to handle your finances. In Pennsylvania this person is referred to as your “guardian.” Your court-appointed guardian may not be the person you would have chosen. A guardian has whatever powers the court gives them. This may be very different than the powers you would want them to have. You can usually avoid putting yourself and your family through this kind of costly and embarrassing public court proceeding by creating a POA.
So, having a POA gives you the freedom to choose the person you think is best suited to step in for you in the event of your incapacity. It allows you to decide, while you are competent, not only who that person will be, but what powers they will have. It protects both you and your family. It is a vastly important and relatively inexpensive document. Every responsible adult should have a POA.
What changes does Act 95 make?
In its many pages, Act 95 makes numerous changes to the law governing POAs. Some of these are obvious, while others are more subtle but important. In this article, I will highlight some of the changes that are most significant to older adults and their agents and advisors.
1. Notice and Acknowledgement. The most obvious changes are to the notice and acknowledgment forms that are signed by the principal and the agent.
The principal signs a notice form that contains state mandated information about the significance of the POA. Act 95 revises the language that is to be used in the notice. The new Act 95 language warns the principal that a grant of broad authority may allow the agent to give away the principal’s property while the principal is alive or change how the principal’s property is distributed at death. The notice advises the principal to seek the advice of an attorney.
The agent signs an acknowledgment form accepting the duties that go with acting as an agent, and agreeing to act in conformity with the principal’s expectations, in good faith and only within the scope of the authority granted in the document. The form must be in substantial conformity with the new language set out in the Act. An agent has no authority to act until he or she has signed this acknowledgment form and it is affixed to the POA document.
It is important to note that Act 95’s provisions regarding the new language in the notice and acknowledgment forms do not take effect until January 1, 2015. POAs signed before that date should continue to use the language from the prior law.
2. New Execution Requirements – 2 witnesses and notarization. Before Act 95, there was normally no requirement that a POA be notarized or even witnessed. The new law requires both. Beginning with documents signed on or after January 1, 2015, a POA must be notarized and have two qualified witnesses.
The new requirements for witnesses and notarization are seen as being more protective of the principal by reducing the potential for situations involving undue influence or duress or for POAs being signed by individuals who don’t know what they are doing. Having documents witnessed and notarized carries the additional benefit of resulting in documents that can be recorded if needed, as with real estate transactions.
On the minus side, these more demanding requirements may raise the expense of getting a POA signed, especially when the signing is to take place in a nursing home or other institution. Many institutions won’t let their staffs witness legal documents so witnesses and notaries are hard to find at such locations.
Note that commercial POAs used in commercial transactions are exempt from these requirements. And POAs that are limited to health care do not have to be notarized.
3. The Agents powers and duties must be laid out with greater care.
A POA can be an inexpensive, efficient and relatively private method of managing your financial affairs. A skillfully prepared POA which gives your agent asset protection authority is the crucial planning tool that can protect your family’s financial security in the event of your incapacity.
But, in the wrong hands, a POA can also be an instrument of financial exploitation. So, the law tries to strike a balance which gives you the ability to give your agent the powers you desire him or her to have, but which also helps prevent, detect, and prosecute abuse by the agent.
The abuse prevention protections in Act 95 include provisions that specify duties that the agent owes to the principal as well as limitations on the certain actions that may be taken by the agent.
The agent’s duties are divided into mandatory duties that apply in every case, and default duties that the principal can waive in appropriate circumstances. The agent’s mandatory duties are to act in good faith, within the scope of the authority granted, and in accordance with the principal’s expectations. These cannot be waived.
Duties you may want to waive. In addition to those mandatory duties, your agent will be subject to a number of default duties which will apply unless the POA specifically directs otherwise. These “waivable duties” are set out in § 5601.3 of Act 95. Among other things, they include duties to keep the agent’s and principal’s funds separate, to keep a record of all receipts, disbursements and transactions made on behalf of the principal, and to attempt to preserve the principal’s estate plan.
You may decide that your agent should not be bound by some of these requirements. For example, you may want to relieve your agent from the requirement to keep a receipt every time they buy something on your behalf. Or you may want your child/agent to be able to commingle your funds with theirs, or to transfer some of your assets in order to facilitate your eligibility for Medicaid, VA pension, or other benefit programs. If you want to release your agent from any of these duties, that waiver must be included in your POA document.
Powers you may want to grant. The law also attempts to reduce the potential for financial abuse by prohibiting your agent from taking certain actions unless they are specially authorized in your POA. Lawyers have taken to referring to these actions that must be expressly authorized as “hot powers.” The hot powers include actions that have the potential to dissipate your property or change your estate plan – like making a gift on your behalf or changing a beneficiary designation on an insurance policy or IRA. If you want your agent to have any of these powers, the authority must be set out in your POA document.
For example, if you are naming your daughter to be your agent, you may want her to have the authority to transfer assets to your wife so that you will be able to qualify for Medicaid assistance if you ever need nursing home care. Or, you may want your agent to be able to make gifts to a disabled child, or to a charity you favor, or to support your family. If so, such authority must be included in the POA document.
As you can see, one size does not fit all when it comes to POAs. The duties and powers you want your agent to have are going to depend on your unique circumstances. You can’t rely on a standard form document to meet your needs.
When you see a lawyer to have a POA prepared, be sure to discuss whether the document will waive any of default duties and grant any of the “hot powers.” If your lawyer does not bring up this topic, you should raise it yourself. Or find another lawyer. These issues are just too important to ignore.
4. Third Party Refusals. A POA is useful only if it will be accepted by the financial institution or other third party to whom it is delivered. So, the law includes provisions that can penalize a third party for refusing to accept your POA. On the other hand, the law attempts to protect you from abuse by permitting third parties to question a POA when they have a suspicion that something is amiss or your agent is acting beyond the granted powers.
The new law expands the ability of third parties to question a POA that they are asked to accept. They are not required to accept a POA if they believe in good faith that the document is not valid or the agent does not have the authority to perform the act requested. A POA can also be refused if the third party makes a report to the local protective services agency, or if they know that a report has already been made.
In addition, before accepting the POA a third party can ask the agent to certify that it has not been revoked or otherwise terminated and to provide other factual information concerning the principal, agent or POA. An agent can also be required to obtain an opinion of counsel as to whether the agent is acting within the scope of authority granted under the document.
If the agent has fully complied with the requirements of the law, a third party that refuses to comply with the proper instructions of the agent is subject to liability for financial harm caused to the principal by the refusal and to a court order mandating acceptance of the POA.
5. Exemption of Health Care Powers of Attorney from some Requirements.
Act 95’s requirements regarding notarization, the notice signed by the principal, the acknowledgment signed by the agent, and the provisions relating to an agent’s duties do not apply to a power of attorney which exclusively provides for making health care decisions or mental health care decisions. Nor do these financial protection provisions apply to certain POAs used in certain commercial transactions.
6. Should you Update your Existing POA?
Some of the most noticeable changes made by Act 95 do not apply to POAs that were created before the changes become effective. This includes the new witness and notary rules, the new notice and acknowledgment forms, and the requirements for authorizing “hot powers” authority. POAs that used the old notice and acknowledgment forms and that were in conformity with the law at the time they were signed remain valid.
It is notable that the changes to the duties placed on agents do apply to any actions taken by an agent after January 1, 2015. This is true even though the POA itself predates the new law. These changes include the requirements that the agent act so as not to create a conflict of interest and that the agent attempt to preserve the principal’s estate plan. Act 95 provides that these duties can be waived in the POA document. But, that may be a problem for documents that were created before the provisions of Act 95 were known.
In addition, if you have an old pre-Act 95 POA, your agent may run into practical difficulties using it after 2015. Even though your old POA may remain valid, a bank officer or other third party may not be comfortable making that decision. A financial institution may ask your agent to provide an opinion of counsel. Or, since they are not experts on the new law, some may just (however improperly) reject an older POA that does not contain the updated notice and acknowledgment forms.
So, while Act 95 does not require that you get a new POA, it makes sense to have your current document reviewed by a lawyer who is familiar with the new law. Legally, existing POAs remain valid. Practically, your old POA may not be the best document for you or your agent. You may want to update your POA so that it will more likely be readily accepted by your bank and other financial institutions.
While you are getting your existing document reviewed for adequacy under the new law, be sure to consider whether it truly meets your current needs and circumstances. For example:
- Is the person you named as agent still the best person for the job?
- Should the person(s) you named as back-up agent(s) be changed?
- Does your document accurately express your desires regarding the duties being placed on your agent and any hot power authorities he or she is given?
- Should some of the agent’s duties be waived so that a trusted family member who is your designated agent doesn’t violate them?
Be especially wary of any POA that was not prepared by a lawyer who is an expert in the requirements of Pennsylvania law on the subject. And if your document was not prepared by a lawyer (for example, if you got it online) you cannot rely on its adequacy. Don’t be penny wise and dollar foolish – see a lawyer.
Bottom Line: 2015 seems like the perfect time to review the quality and appropriateness of your existing POA and update it as needed.
Act 95 makes changes to Title 20, Chapter 56 of the Pennsylvania Probate, Estates and Fiduciaries Code (20 Pa.C.S. §§ 5601 – 5612). This statute and other Pennsylvania laws are available online on the Pennsylvania General Assembly website at http://www.legis.state.pa.us/.
Don’t Forget to Take your Required Retirement Plan Distribution
If you have an IRA or workplace retirement plan and were born before July 1, 1944, you generally must take a required minimum distribution (RMD) from your plan(s) by December 31, 2014.
If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax on the RMD amount you failed to take out. The RMD rules apply to those with traditional IRAs and also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
There are some exceptions.
Just turned 70 ½ exception. Individuals born after June 30, 1943 and before July 1, 1944 are eligible for a special rule. The deadline for RMD payments is April 1, 2015, if you turned 70½ in 2014.Though payments made to these taxpayers in early 2015 can be counted toward their 2014 RMD, they are still taxable in 2015. This means there is the opportunity for these taxpayers to shift their RMD income between these years to minimize overall tax liabilities.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. This means that those persons deferring their 2014 RMD to 2015 will end up having two taxable distributions to report in 2015.
Roth Exception. The required distribution rules do not apply to owners of Roth IRAs while the original owner is alive.
Still working Exception for Workplace Plans. Though the RMD rules are mandatory for all owners of traditional IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in IRS Publication 575.
Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.
The RMD for 2014 is based on the taxpayer’s life expectancy on Dec. 31, 2014, and their account balance on Dec. 31, 2013. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. (To compute your RMD you can use the online worksheets on IRS.gov or you can use the worksheets and life expectancy tables in the Appendices to IRS Publication 590.)
For most taxpayers, the RMD is based on Table III (Uniform Lifetime) in the IRS publication on IRAs. So for a taxpayer who turned 72 in 2014, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2014 RMD, this amount was on the 2013 Form 5498 normally issued to the owner during January 2014.
This blog post is based on information provided by the IRS in in Tax Tips Issue Number 2014-24 (December 9, 2014). You can find more information on RMDs, including answers to frequently asked questions, on IRS.gov.
Additional Resources from the IRS:
- Publication 590, Individual Retirement Arrangements (IRAs)
- Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
IRS YouTube Video:
Questions and Answers for Executors
A family member or friend has named you as their executor. If you have never served as executor before, you probably have a lot of questions and concerns.
You take on a lot of responsibility when you serve as an executor. You will have a lot to do, including:
- Collecting property owned by the decedent at the time of death.
- Contracting the services of an appraiser(s) to perform the required appraisals for real and personal property.
- Paying all valid claims from creditors of the deceased. This may include reimbursements owed to Pennsylvania under its estate recovery program.
- Filing an inheritance tax return and all required income tax returns and paying the taxes. In some cases you may have to file a federal estate tax return.
- Filing an accounting with the Court or getting a settlement agreement among all beneficiaries.
- Distributing the estate to the beneficiaries in conformity with the approved accounting or settlement agreement.
Here are some of the questions we frequently are asked by executors:
1. Am I required to accept the appointment as an executor?
Being appointed as executor does not mean you have to accept. You may renounce your appointment, in which case the alternate executor named in the decedent’s Will can become the executor. If there is no alternate an “administrator” will be appointed in conformity with state laws.
2. As an executor am I personally liable for the debts of the decedent?
As long as the executor properly administers the estate according to the law, he or she will not be held personally liable for any debts owed by the decedent.
3. Am I entitled to compensation for acting as an executor?
Yes, you are entitled to reasonable compensation. Keep in mind that you will have to pay income tax on the compensation you receive from the Estate because it is income you earned. If anyone complains that your fee is excessive the amount is subject to review by the Court
4. How long will it take for my work as executor to be completed?
Although there is no definite answer to this question, the average estate administration takes approximately one year. Some estates may be concluded is less time and some estates may take longer. In most cases, the size of the estate and the type of assets in the estate dictate the time frame. Inheritance taxes are due 9 months after the date of death.
5. Do I need the assistance of a lawyer?
There is no legal requirement that you must contract the services of an attorney to help you administer an estate. However, it is good common sense. Few people have the legal knowledge or experience to properly administer an estate. Even experienced executors usually hire an attorney. As an executor you may be held personally responsible if you fail to properly handle the estate or pay taxes. It is generally in your best interest and the best interest of the beneficiaries of the estate to hire an experienced lawyer to help you through the process.
At Marshall, Parker and Weber we make your work as an executor as easy and worry-free as possible. We guide you through each step of the process and ensure that you meet all of your responsibilities and the estate is administered and distributed properly.
Our Estate Administration Department is staffed by attorneys and paralegals with many years of experience in performing Estate Administration work. We are a very “hands on” law firm and we will work to make your experience as an executor as simple and stress-free as possible.
Note: this article is intended to give you a brief overview of your responsibilities as an executor and is not to be relied upon as legal advice. The duties of an executor are not limited to the responsibilities set forth in this article.
Special Planning for Special Needs
Having a child, grandchild, or other potential beneficiary with a disability (often referred to as having “special needs”) makes estate planning more difficult. Proper planning of your will, trust, and beneficiary designations is complicated when you want to protect and provide for an heir with special needs.
With wise advance planning you can provide for all of your family members without jeopardizing a special needs individual’s current (or potential) eligibility for important government benefits such as Supplemental Security Income (“SSI”) and Medicaid. These “needs based” government programs can provide substantial support for your special needs beneficiary but only if you set things up so that the beneficiary will be able to meet the programs’ financial standards.
The rules are complicated and it’s easy to make a mistake. Here are some of common mistakes to avoid when planning for a special needs beneficiary:
(1) Making an inheritance directly payable to the special needs individual from your will, trust, insurance policy, annuity, or retirement plan. The direct receipt of an inheritance will likely make the beneficiary ineligible for continued SSI and Medicaid benefits.
(2) Disinheriting the special needs person entirely and leaving an already vulnerable beneficiary even more dependent upon the uncertain future generosity of the government.
(3) Leaving property to another family member with an “understanding” that they will use the funds to take care of the special needs individual. This plan is fraught with danger and complexity. What if the other family member dies, runs into medical or financial or marital difficulty, or becomes estranged from the special needs person?
(4) Establishing a “support trust” for the special needs beneficiary. The assets in a support trust may have to be spent down before needed public benefits become available.
There are much better ways to plan. The most common estate planning tool is the “Special Needs Trust” which can be created to take effect either during your lifetime or upon your death.
The term “special needs trust” refers to a trust whose funds are deemed to be “unavailable” for purposes of means-tested public benefit programs like SSI and Medicaid. This type of trust is designed to complement rather than replace public benefit supports that are available to the beneficiary.
There are different varieties of special needs trust.
As a parent or grandparent you can set up a “third-party trust” or “discretionary special needs trusts,” which are created by someone other than the public benefit beneficiary. Since these trusts were not created by the individual seeking benefits, many harsh Medicaid program limitations do not apply. This type of trust is frequently a testamentary (created by Will) trust to provide for a disabled child or other beneficiary of the deceased’s estate.
Self-funded special needs trusts (also known as payback trusts) are created under federal Medicaid law. These trusts are created from the funds of the disabled beneficiary and require payback to the state for the Medical Assistance benefits it paid out.
Another option is to use a pooled trust which can be funded by third parties or from the assets of the disabled beneficiary. It is managed by a nonprofit trustee. At the death of the disabled beneficiary, the residue is retained by the pooled trust to use for other disabled persons. Even small inheritance amounts can be accepted by a pooled trust.
A Special Needs Trust can provide for the beneficiary’s continuing eligibility for government benefits, protect the inheritance from claims for government reimbursement, and protect the inheritance from loss to third parties, including siblings, grandparents, aunts, uncles and friends who may have the best of intentions.
Your special needs trust should be carefully drafted by a lawyer who is familiar with this area of law. A wrong word can make all the difference between creating a fund that will enhance the beneficiary’s life by supplementing public benefits, and a fund that will quickly be exhausted replacing those government benefits.
In Pennsylvania, Marshall, Parker and Weber has the experience needed to help your family plan to protect your special needs child or grandchild. Give us a call if you would like to talk about how to best meet your goals.