Clients often ask questions about the use of beneficiary designations in their estate planning. Beneficiary designations can be a convenient way to avoid probate in some situations. If an individual is named as a direct beneficiary on an asset, that asset passes automatically to that individual, regardless of the terms of the decedent’s Will, Trust, or other estate planning documents.
Your attorney will often recommend that you coordinate your Payable-on-Death (POD) beneficiary designations or Transfer-on-Death (TOD) beneficiary designations to follow the distribution patterns in your overall estate plan for the purpose of avoiding probate. Despite the convenience, however, there are several good reasons to consider alternatives to direct beneficiary designations.
1. When you name direct beneficiaries using TOD and POD beneficiary designations to transfer all of your assets directly to those named beneficiaries, there is no one in charge of settling your estate. Furthermore, naming direct beneficiaries means there is no funding mechanism so that the person in charge can pay for funeral and burial, medical bills, debts, and administration expenses.
2. If you have relied on TOD and POD beneficiary designations to transfer all of your assets on death, there is no legal method for handling the disposition of tangible personal property, such as household furniture and furnishings, personal effects of sentimental value, motor vehicles, RVs, and watercraft.
3. While using TOD and POD beneficiary designations avoids the need to have an executor or personal representative appointed, this means that there is no one with the legal authority to file final income tax returns for the decedent. A trustee of a revocable trust has this authority, and so does the executor or personal representative named in a Will. The personal representative named in a Will has no legal authority unless there is a probate proceeding which admits the Will to probate.
In addition to the potential complications above, there are unique complications with respect to Transfer on Death (TOD) deeds for the purpose of transferring real estate without probate.
1. A TOD deed designating multiple children will effectively transfer title of the real estate directly to those children without probate proceedings. While the ease of transfer is convenient, none of the children have a greater say in the maintenance and disposition of the real estate. This can leave children in an untenable situation if they disagree about the disposition of the property, such as whether to sell the property or whether to make improvements to the property to prepare it for sale; not to mention the expenses in maintaining the property in the interim. The TOD transfer of title would even make it legal for one of the children to move into the residence and live there, while refusing to sell the residence.
2. A TOD beneficiary designation often does not cover contingencies. What happens if the named beneficiary predeceases the owner? We might expect that a parent will change their TOD beneficiary designations if a child predeceases them; however, what if the parent is mentally incapacitated, or simply does not take care of it? There is no simple procedure for determining who the successor beneficiaries are for purposes of providing clear title to the real estate. In the event a predeceased beneficiary’s minor children become the successor beneficiaries, real estate cannot be transferred to them without cumbersome court proceedings, such as a guardianship. Going forward, the court would be involved in all transactions involving the real estate, including sale. Furthermore, there is no ability to hold assets for the minor beneficiaries once they become the age of 18.
3. If a TOD beneficiary is in a nursing home and receiving Medical Assistance (Medicaid) benefits, the automatic transfer of real estate to them will affect their Medicaid eligibility and, in all likelihood, cause a loss of benefits. Their proceeds from the sale of the property will likely have to be used to pay nursing home expenses.
Consideration of whether or not to use direct beneficiary designations is crucial to your estate plan. While it may work well in some situations, it is important to consider both the advantages and disadvantages and work closely with your estate planning attorney to avoid common pitfalls. When in doubt, seek proper legal advice before completing direct beneficiary forms to make sure your designations are consistent with your overall estate planning goals.
If you are considering transferring your property to your children and retaining a life estate, you may want to act now to avoid the adverse effects of Wisconsin Act 20, which changed the law to allow estate recovery from certain non-probate assets, including life estates. (See Changes To Life Estates and Jointly-Held Property detailing the change in the law.) The Wisconsin Department of Health Services (DHS) has announced that it will not pursue recovery from life estates created before August 1, 2014. It will only pursue recovery from life estates created on or after that date. It is important to note that the actual law itself remains unchanged, and the DHS could change its position on recovery from life estates in the future. At this time, however, if you created a life estate in property prior to August 1, 2014 and subsequently receive Medicaid benefits, the DHS will not pursue estate recovery against the property and remainder owners for the value of your life estate interest.
A life estate is created when a property holder (life tenant) transfers ownership of the property to someone else (remainder owner) but retains the right to reside in and benefit from the real estate. Prior to the implementation of Wisconsin Act 20, the DHS could not pursue a claim against the remainder owner in the property after the death of the life tenant for Medicaid benefits paid on behalf of the life tenant while they were alive. However, Wisconsin Act 20 now provides that any property of a decedent (including life estates) that is transferred by a person who has possession of the property at the time of the decedent’s death is subject to the right of the Department of Health Services to recover the value of the decedent’s interest in the property. The interest that is subject to recovery is determined using Medicaid life expectancy tables and represents the fair market value of the decedent’s fractional interest in the property immediately prior to death.
The imposition of estate recovery against life estates is a wide expansion of the estate recovery rules. Of particular concern was the fact that the new law, as it is written, appears to apply to all life estates currently in existence, not just to those created after the effective date of the new law. In other words, life estates created prior to the enactment of the law were not exempt from its provisions.
The announcement from the DHS that it will only pursue recovery from life estates created on or after August 1, 2014 means that those who have previously created life estates remain unaffected by the new estate recovery law. It also presents an opportunity for individuals who are thinking of creating a life estate to do so before the new law will affect the property, as long as the creation takes place before August 1, 2014.
Important Changes To Medicaid and Long-Term Care Planning
New Wis. Stat. s. 49.849(3)(a) provides that any property of a decedent that is transferred by a person who has possession of the property at the time of the decedent’s death is subject to the right of the DHS to recover the value of the decedent’s interest in the property. The interest in property or value equal to the same is to be transmitted to the DHS. Property of a decedent is defined as:
“all real and personal property to which the recipient had any legal interest in immediately before death, to the extent of that title or interest, including assets transferred to a survivor, heir, or assignee through joint tenancy, tenancy in common, survivorship, life estate, living trust or any other arrangement.”
There is a presumption that all property of a deceased surviving spouse was marital, and therefore, the deceased surviving spouse’s property is also subject to these requirements. The amount that the DHS can recover is based on the fair market value of the decedent’s fractional interest in the property. The burden of proof for establishing value is on the surviving owners or beneficiaries, or their representatives. Fair market value must be established through a credible methodology, which may include appraisal. For life estates, the fractional value will be based on the life estate-remainderman tables used by the DHS to value life estates. The value will be determined as of the Medicaid recipient’s date of death, as though he or she is still alive.
Although the new law provides no method for the timing of the notice, or for assuring that the alleged surviving joint tenant, remainderman or beneficiaries actually receive the notice from the DHS, failure to comply can result in a request for a court order and judgment against the tenant, remainderman or beneficiary without notice. A person who is in possession of property subject to the new law and who has received a notice from the DHS can request a fair hearing within 45 days of the notice. The right to a fair hearing, however, is limited to a determination on the value of the property and the percentage of ownership of the Medicaid recipient in the asset.
The new law applies to all of the enumerated property interests currently in existence, not just to those created after October 1, 2013. The applicable time frame will be for deaths occurring after the effective date of the new law.