There are numerous misconceptions in life and estate planning, but some are more widespread than others. Recently, I’ve come across a few that some attorneys have reportedly gotten wrong, much to their client’s eventual harm. Here are four of the biggest ones out there. And for the regulars, while this might seem basic, if attorneys are getting some of these wrong, then it’s time to go over the basics again.
The first big myth is that you can give away up to $13,000 a year to each of your children and it won’t count against a Medicaid spend down. Totally not true. What we have here is a mixture of the annual exclusion for gift taxes and the desire to get assets out of a person’s control in order to qualify for Medicaid. Up to $13,000 can be gifted away to each child (or anyone else) without incurring gift taxes, but any gifts to children in order to qualify for Medicaid must be done more than five years prior to applying for Medicaid. In other words, this is like having a coupon for a free quarter-pound burger at a Hardee’s and trying to use it at McDonald’s. It just doesn’t work.
Another big myth is that there is any one or a few techniques that will allow a person to qualify for Medicaid. In other words, “All you have to do to qualify for Medicaid is …” Nothing could be further from the truth. Medicaid qualification is extremely complex, and if anyone tells you that there are simple solutions, other than going broke, then they are dead wrong. Every situation is different, and Medicaid planning requires a comprehensive approach. Unlike general estate planning, if you “leave something out” of your estate plan, then the rest of the plan still works. When something is left out of a Medicaid plan, the whole thing is likely to blow up. Compare this to leaving a pair of socks out of your camping gear. The world won’t come to an end. On the other hand, leaving a piece of safety equipment for a nuclear reactor out could be. Treat Medicaid planning like the nuclear reactor so everything is included and a comprehensive plan is fully executed.
Yet another, very basic misconception is that avoiding probate is somehow the equivalent of avoiding estate taxes. While most people want to avoid the administrative costs and delays of probate for their estate, they also want to avoid paying estate taxes. Unfortunately, avoiding one does not necessarily mean you avoid the other. While it is true the avoidance of estate taxes often avoids probate, mainly because you are giving control of assets away so they aren’t in your estate anymore, it is not true that if you use a revocable living trust to avoid probate that it will also avoid estate taxes. This is probably a mythconception advanced by financial advisors who claim that having the right revocable living trust can avoid unnecessary taxes. For couples, the right kind of tax provisions in a revocable trust can minimize estate taxes. That is very true. But the quick statement without explanation probably lead many people to wrongly believe that avoiding probate means avoiding estate taxes.
The final of the four big mythconceptions is that age limits in a Last Will and Testament will somehow control the age of inheritance for named beneficiaries of a life insurance policy or retirement account. Again, this is completely untrue. In fact, listing people to inherit your estate through your Will does absolutely nothing to override the beneficiaries named on an account. If you list your brother to receive your estate in your Last Will and Testament but have your ex-spouse named as the beneficiary of your life insurance policy, the ex gets the insurance money. (Cue panic and Benny Hill music as divorced people everywhere start rifling through drawers to find their life insurance and retirement account information). This is because a Will only controls what goes through probate, and because beneficiary designations avoid probate the terms of the Will are meaningless for that asset.
Life and estate planning, and particularly Medicaid planning, is not so simple, and there is a lot of myth and mystery to why things work the way they do… at least until someone explains them. That’s what we’re here for.