Law News and Tips

Selling the Business

Fred Vilbig - Friday, June 02, 2017

 

SELLING THE BUSINESS

Fred L. Vilbig © 2017

     I grew up in Dallas, Texas, where my grandfather owned a construction company. It was 100 years old. He had inherited it from his father, who had inherited it from his father. A family business surviving through three generations is not unheard of, it is extremely rare. Then along came my grandmother.

     When my grandfather died in 1976, his business was worth the current equivalent of almost $5 million. My grandmother could have sold the business to the highest bidder, either in a stock sale or an asset sale. However, for all of her wonderful qualities, she was not a businesswoman. She simply liquidated the assets. She sold the bulldozers, the scrapers, the maintainers, and all of the other hard assets, basically taking pennies on the dollar. She let the name and all of that built up goodwill just evaporate. I don’t know exactly what was lost, but I would estimate that it could have been as much as 75% of the value of the business.

     For many business owners, this would be an unimaginable tragedy. Since owners typically pump every available resource into their businesses, they do not have a substantial 401(k) or SEP or any other kind of retirement savings. Their business is their retirement. However, that may be a problem.

     Over the next 10 to 15 years, it is estimated that over 12 million privately owned businesses will change hands because they are owned by baby boomers. Some analysts are concerned that so many businesses for sale at one time may flood the market and depress values – good for buyers, but bad for sellers. Careful business planning is critical, but so many times, business owners are too busy to plan. That is a mistake.

     In planning to sell a business, there are a number of factors that need to be considered. First and foremost, who are your potential buyers? Sometimes inside sales can net more because the buyers are familiar with the business. Is there a family member in the business? If not, is there one or several key employees who might be interested in buying the business?

     If there is a possible inside buyer, how will they pay for it? Do they have cash? Typically, they do not. Can they get a loan? Does SBA financing work for them? Is the owner willing to take back some or all of the purchase price?

     If the inside sale doesn’t work, how do you find good third-party buyers? There may be competitors lurking around waiting to snatch up your business in order to gain a larger market share. Or, there may be individuals who are just interested in owning their own business. Trying to identify them can be a challenge. Sometimes it is best to talk to business brokers, but how do you select the best broker for your type of business?

     And then there is the question of valuation. Businesses can be valued on hard assets and/or cash flows. Some businesses can have what is called a “strategic value” to a particular buyer (for instance, a competitor who is trying to gain market share) which may be more than the strict appraised value. In any event, business owners need to be realistic in setting a price for their businesses. Many times owners overvalue their businesses. If the owner is working with a broker, the broker can help to set the value. If it is an inside sale to a family member or to one or more key employees, then the company accountant may be able to help establish a value.

     In any event, the sale of the business will have a huge impact on the business owner and his or her family. As I said, careful consideration needs to be given to all these factors. Otherwise, you could end up with a liquidation and the loss of years of hard work, like my family, and that is not a good thing.

Thinking of selling your business? Want to plan for your future?
Contact Fred now about your situation.

The first consultation is free. Or call him now at (314) 241-3963


 Check out Fred's other BLOG post on business planning. His articles: Business Planning I and Business Planning II are worth a few minutes to read. You may know many of the key points in these articles it's worth reviewing them, especially if you're planning to buy or sell a business or separate from your business partner.  

 

Successor Trustee Boot Camp

Fred Vilbig - Monday, May 22, 2017

 

SUCCESSOR TRUSTEE BOOT CAMP

Fred L. Vilbig © 2017

     Maybe it’s a sign that my clients are “maturing.” I’m getting more calls now from their children. Mom and dad or both are acting a little strange; their bills are not getting paid; they have to go into the hospital or nursing home and decisions need to be made; or they have both died. Typically these calls come from the child who has been put in charge of things. Mom and dad may have written a will and/or a trust, and that child has been named as the person in charge (the “fiduciary”). And they don’t know what to do.

     The duties of a fiduciary vary widely depending upon the situation. Mom and dad may just be losing mental capacity. We can all be forgetful, but sometimes people get dangerously forgetful. Bills can become seriously delinquent. They may get lost when out driving or walking around. They may not know how to dress for the weather. Prescribed medicines may become too complicated to administer. Although everyone wants to maintain their own independence, there comes a time when that isn’t reasonable. So what do you do?

     And when mom and dad get to the end of their lives, someone may need to make difficult medical decisions. People cavalierly say, “just go on and pull the plug,” but actually doing it is another matter entirely. And then there is the funeral to handle.

     After mom and dad have died, there is an asset cleanup to do. What do you do about jointly held assets? What about insurance policies, brokerage accounts, or bank accounts with beneficiary designations? What about the IRA? What about jointly held real estate? We’ve had clients ignore these things for years, and fixing them later can be a lot of work.

     If a person only has a will and dies owning property in his or her name alone, then probate is necessary. Even when mom and dad have created a trust, assets sometimes get overlooked. Probate can be a scary idea for people, but sometimes it’s a necessary evil. One of the things that the fiduciary needs to do after mom and dad have died is to determine whether all of the assets were properly put into a trust if there was one. If any assets were held in a decedent’s name alone, then those assets are going to have to be probated. That can be overwhelming for some people.

     If mom and dad did create a trust, there are a lot of questions that come up regarding trust administration. Under the law, a trustee has to provide beneficiaries with an accounting. The trustee needs to start with a beginning balance which requires an inventory. Most people don’t have an accounting background, so this can be quite a challenge. Just preparing the inventory can be overwhelming.

     There is a lot involved when a son or daughter is named as the trustee, personal representative, or attorney-in-fact, under mom or dad’s estate planning documents. As I often tell clients, these are not normal things to deal with, although in our practice they tend to happen on an almost daily basis.

     For that reason, I am putting together a seminar to discuss what’s involved in being a fiduciary. We are calling it the “SUCCESSOR TRUSTEE BOOT CAMP” (although we’ll cover other fiduciary roles as well). The seminar will be held on JUNE 15 at 7 PM at the SCHNUCKS MARKET on Kehrs Mill at Clarkson in Ballwin. Click here to register for the free Successor Trustee Boot Camp.

This seminar should be of interest to anyone who is named in estate planning documents as a personal representative or a successor trustee. We look forward to seeing you there.

 

When Mom Dies . . . Part 2

Fred Vilbig - Tuesday, April 18, 2017

 

WHEN MOM DIES … (Part 2)

       More Things to Be Done

In another paper, I talk about some of the things that people need to take care of when a family member or close friend dies.That paper dealt with things such as notifying government agencies and financial institutions in order to avoid identity theft or fraud. Now I want to turn to some of the administrative things you may need to do.

Funerals

First I should talk about the funeral. Although I have had some people say that planning a person’s funeral can be rewarding since everyone reminisces about the decedent, it can also be stressful. If you are lucky, the decedent had pre-arranged their funeral which takes a lot of the burden off of loved ones.However, there are still a few administrative things that need to be taken care of.

If the decedent did not have a pre-arranged funeral, then you will need to choose a funeral home. Once you’re selected the funeral home, you need to (1) arrange for the body to be transported there; (2) pick out a casket (which is not fun); (3) discuss all of the arrangements with the funeral director (and it seems like there are millions of them); and (4) then figure out how to pay for all of this. This process can be a lot of work under very stressful conditions.

I have found that it isn’t until after the funeral that you really have time to grieve. It’s not until all the activity is over and everyone has left that you realize what has happened.It is important to take time to get through that period, but don’t drown in it.

The Will

When you’re ready, you need to start the work. You need to search all of the decedent’s records to see what assets they owned and to find any important papers.If you find an original will, you are required to file it with the probate court where the person died.If you only find a copy, you are not required to file the copy. The will might be in a safe or safe-deposit box, but you need to try to locate it.If a will isn’t filed within a year of a decedent’s death, then it is invalid, and any probate required would be what is called intestate.

Life Insurance

In your search, you may come across one or more life insurance policies.Sometimes our clients find very old, rather small policies.In fact, some of those particular insurance companies may no longer be around.However, paid-up outstanding insurance policies don’t just disappear.Some insurance company would have taken them over, and they will be required to pay the benefit.You just need to talk to the state Department of Insurance to track them down.Then you need to figure out who the beneficiaries are, and they need to file a claim.

Retirement Accounts

You may also come across retirement accounts such as IRAs or 401(k)s (403(b)s for employees of nonprofit corporations).You need to determine who the beneficiaries are and notify them so they can file a claim.If you don’t know who they are, you should contact the plan administrator.In any event, the beneficiaries may want to ask you questions about these accounts, but be very careful.Inherited IRAs can be kind of tricky with some tax land mines hidden below the surface.It is best to direct them to their financial planner or tax professional.Better safe than sorry.

Joint Property

Then there is the question of joint property. If property – whether it be bank accounts, real estate, brokerage accounts, individual stocks, or any other property – is owned jointly, then ownership transfers to the surviving joint owner(s).In the case of financial assets, either you or the joint owner(s) need to notify the financial institution.If the asset is real estate, then you need to file an affidavit as to death with the appropriate deed recorder’s office.

Probate

If it turns out that some or all of these assets were owned solely in the decedent’s name, and if the total value of the assets is less than $40,000, then you can administer those assets in a small estate. However, if the value of the assets is over $40,000, then you need to open a full estate.Either way, those assets are frozen until you get some sort of a court order.

Taking care of things after a person’s death is not necessarily an easy thing to do. Still, it is important for the survivors that things get done properly.Care and attention to detail is invaluable.Otherwise, problems may pop up in future years.And fixing things 10 or even 20 years from now is harder than just fixing them now.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

When Mom Dies . . .

Fred Vilbig - Tuesday, April 18, 2017

 

                                                              WHEN MOM DIES …

When mom dies – or for that matter, whenever any close family member or friend dies and you are responsible for taking care of things – you can be overwhelmed. First, you have to deal with the loss. Even when they have been sick for some time, and you knew it was coming, it’s still hard.People are immeasurably valuable, and the death of anyone is a great loss.

But after dealing with the personal and the emotional loss, unfortunately, there’s business to be done. We live in a world full of opportunists. With all of our connectivity, people on the other side of the world may try to steal a decedent’s identity for financial gain. Local people may have other purposes.In order to avoid a lot of problems when someone dies, you need to do certain things.

Government Benefits

If the decedent was receiving some kind of government benefits, the proper government agency needs to be notified.With older people, that is typically Social Security.If the decedent was receiving some kind of military benefit, then the appropriate defense agency needs to be contacted.If they were a former civil servant, then the Office of Personnel Management needs to be contacted.Also, don’t forget to notify the Department of Revenue and cancel their driver’s license.

Financial Accounts

On the financial side of things, you need to search and find all of the decedent’s records regarding credit cards, bank accounts, mortgages, investment or brokerage accounts, and pension benefits.You need to let all of the appropriate people know that the decedent has died.You need to cancel the decedent’s credit cards.If the financial accounts were owned solely by the decedent, then once you tell the financial institution of the decedent’s death, then the accounts are going to be frozen until they receive a copy of a court order appointing a personal representative.

Property Insurance

Several miscellaneous things need to be tended to as well.Although it can be problematic, you really should notify the insurance company insuring the decedent’s home.The problem with this is that most insurance companies don’t like to insure vacant property.They are usually willing to insure the property for a reasonable time for administration, but that is a limited time.They will want you to sell it or lease it as soon as possible, and if neither of those happen, then they may cancel the insurance.

Miscellaneous

You should also notify the credit reporting agencies so they can close those accounts.You should put the decedent’s name on the “Deceased Do Not Call List.”You should also notify social media companies such as Facebook, Twitter, LinkedIn, Instagram, and whatever else the decedent might have been on.

As annoying as all of this might be, tending to all of these details can save a lot of future headaches, time, and even financial loss. There are some bad people prowling around out there, and we all need to protect ourselves and our loved ones.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

Medicaid Income-Only Trusts

Fred Vilbig - Wednesday, March 15, 2017

MEDICAID PLANNING

Fred L. Vilbig © 2017

 

     When I first started practicing law in the early 80’s, it was relatively easy to use trusts to get people to qualify for Medicaid.Congress caught on, though.  They played around with the rules so that it usually looked as if short of giving all of your money away 5 years before you might go into a nursing home, you wouldn’t qualify for Medicaid.  That meant that you would have to be destitute for 5 years even though you may not end up needing to go into a nursing home.

     We have been working on a case in the St. Louis County Probate Court where to settle the case, we have to set aside some money for the benefit of the claimant.  Since the claim is being disputed, we don’t want to just give the other guy the money, and we certainly don’t want a nursing home to get it.  So that started me thinking.

     I had heard about irrevocable, income-only Medicaid trusts, but no one had really been able to explain the law behind them to my satisfaction.  As a part of this case, I had reason to research the issues on my own.  And I found out that, in fact, they do work.

     When qualifying for Medicaid, you’re not supposed to have income in excess of a certain amount.  It varies from state to state, but in Missouri right now, it’s $834 per month for an individual and $1,129 for a couple.  If you have less income than that, you are treated as “categorically needy.”  These are the people you would ordinarily consider as needy.

     But there’s another category of Medicaid beneficiaries. These are people who receive more than the threshold amount, but not enough to pay the Medicaid rate for nursing care. Their income falls a little short.  These are the “medically needy.”  They have to “spend down” their own income, and Medicaid makes up the balance.

     On the asset side, a Medicaid applicant can have no more than a certain amount of “non-exempt” “available resources” before being disqualified.Certain assets are excluded from this calculation such as the applicant’s residence (but there will be a lien put against it for any Medicaid benefits received), one automobile, household goods, and some other miscellaneous items.  Currently in Missouri, that maximum amount of available resources is $1,000 for an individual and $2,000 for a couple.  People will give away assets to get down to that level, but then you have to live in poverty for 5 years, and like I said above, you might not even need nursing care.I’m not sure that risk is worth taking.

     The dilemma is how do you make your “available resources” unavailable without reducing yourself to poverty.  The answer is that you put all or some portion of your assets into an income-only trust and irrevocably give the principal to your children on your death.  You get to keep the income off of the assets, but you give up any rights to the principal.  So long as you don’t file a Medicaid application within 5 years of when you fund the trust, the trust principal is no longer an available resource.

     If you consider doing this, it is important to note that this restriction is very strict.  Under the law, if there is any way for an applicant to get at the principal at any time, that trust principal will be treated as an available resource.

     The reason this works is because there is a single provision in the Medicaid law that allows you to exclude from “available resources” any assets that are not available to the applicant under any circumstances.  Some applicants with trusts tried to retain the right to get distributions under very limited circumstances, but the courts have ruled that the underlying trust assets would then be treated as “available resources.”

     As you can imagine, Medicaid has fought these.  They have litigated these extensively on the East Coast, but unless they were set up wrong, the government has lost all of these cases.

     It should be noted, though, that to my knowledge, no Missouri courts have yet ruled on this issue.  In our case, we are trying to force Missouri HealthNet (the Missouri Medicaid agency) into the case to force the issue.  However, in other cases like ours, they have avoided getting entangled in the lawsuits on procedural grounds.  We’ll still try.

     So although no assurances can be given, it looks as if a client can set up an irrevocable trust, retain the right to income only, give the principal away (but only on death), and be able to limit his or her exposure to nursing home costs.  In analyzing whether to use this strategy, clients need to carefully look at their available resources to see if they can live only on the income the trust will generate.  In addition, long-term care insurance should still be considered in deciding how to plan for this eventuality, but the irrevocable, income-only Medicaid trust might fit into a client’s plan.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

The Not So Durable POA

Fred Vilbig - Wednesday, February 15, 2017

     One of my partners recently came into my office with a story.  He has a client who has lost her mental capacity.  She signed a durable power of attorney (a “POA”) several years ago naming her daughter as her attorney-in-fact (her “agent”) to take care of things when she was no longer able to do so.  The daughter had taken the POA to her mother’s bank to do some banking for her mother.  The bank refused to honor it.  They said they had a policy that they would not accept POAs over 2 years old. Absurd!

     One of my clients recently had a run-in with an insurance company over a POA.  The POA said that the named agent could do anything they needed to do with annuity contracts, “including but not limited to” several listed options.  The client needed to change the beneficiaries on the contract in order to avoid probate.  The insurance company refused.  They said that since changing the annuity beneficiaries was not one of the specifically listed activities, it was not permitted.  Again, absurd!

     Until fairly recently, POAs were not very helpful.  They were only valid as long as the person giving the power (the “principal”) was competent.  They were primarily used in business transactions when travel and communication was difficult.  However, there was always a lot of uncertainty about whether the principal was still competent when the agent was acting under the POA.

     Beginning in about the 1980s, states started adopting what are called “durable” power-of-attorney statutes.  What these statutes did was they made POAs valid even after the principal lost his or her mental capacity. What this means is that an agent can continue handling the principal's business even after the principal becomes incompetent.

     This is a huge advantage for estate planning.  If no one can handle your business affairs for you when you are incompetent, then your family will need to petition the court to have a guardian and conservator appointed to handle those necessary things.  Even if you have a trust, there are assets that are not transferred into a trust that need attention.  And the law gives the agents the power to do those things.  That's why the bank and the insurance company were in the wrong.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

Wills

Fred Vilbig - Thursday, January 19, 2017

WILLS
     
      I recently met with a young couple regarding their estate planning. All things considered (including life insurance), they had a fairly good-sized estate. The problem as with many young families was the cash flow. It was already called for - every last cent - and there was nothing left for extras. Although they knew that they needed to protect their kids in the event of their deaths, they felt that a trust was a luxury. We talked about wills.
     Although I’ve talked about wills in prior posts, I want to return to the topic. I think there are a number of families (particularly young couples with children) who know they need to do some planning, but a trust is just too much. They are comfortable with a simpler, less expensive plan, notwithstanding the benefits of a trust. Why buy a Rolls-Royce when a Honda will cover your needs. So I want to talk about two important things parents can do with a will.
      When young children are involved, one of the main questions is, “Who will get the kids?” If you leave it up to the probate court, it may be a family member (but maybe not the one you want). Or they could end up in foster care. With a will, you get to say who you want to be the guardians of your children.
      Then there’s the question of who will manage the money. The minor children can’t live in the house alone, so it will have to be sold. And most families have some life insurance. Minor children can’t open a bank account, and do you really want an 18-year-old to get control of a few hundred thousand dollars? If you don’t plan, the money may go into a conservatorship to be managed by the public administrator. He can only invest in secure investments like CDs and money market funds. These investments don’t even keep up with inflation.
     With a will, you can provide that the cash will go into a trust to be managed by someone you trust. They can make reasonable investments and use the money for the benefit of your children. It’s a better plan.
      So even if cash is short, it makes sense to do some simple planning. Otherwise, problems loom in the future.

 

Evictions

Fred Vilbig - Thursday, January 19, 2017

EVICTIONS

      Lawyers read court cases… At least most do. When we were in law school, we better read them. You don’t want a law professor calling on you in class when you’re unprepared. They can be pretty mean. I think that’s a job requirement.

      Then when you get out of law school, you keep reading cases for several years. It’s kind of like being an intern studying medicine. Most attorneys don’t feel really comfortable practicing law in till they been doing it for maybe five or six years. After a while, though, lawyers get a handle on the law and start skimming relevant cases instead of reading them completely.

      I have to admit that cases can be pretty boring. A lot of times there talking about rules. There are lots of rules. There are rules for jurisdiction, rules for venue, rules for what arguments can and must be made in a particular cause of action. Those rules can be really boring.

      But under every case there is a story. A lot of times the story is buried under a lot of rules talk, but there is a story down there somewhere. Sometimes the story is sad; sometimes the story is funny; and sometimes it is just perplexing.

      One case recently caught my eye because of the story, but also because of the rule. As you may recall from some earlier columns, we’ve had a number of situations where mom and dad have both died, and a child (usually a son) who was living at home refuses to leave.

      The case in question, Kocina v. Johannes, was the opposite. Kocina owned an apartment complex. She hired Johannes’ son to maintain the complex in exchange for a furnished apartment and utilities. Tracy Johannes moved in with her son. At some point, the sun notified Kocina that he was quitting. Kocina offered to renting the apartment. He said no, and left… With his mother staying in the apartment. Kocina provided Jahangir, with notice to vacate the apartment. When she didn’t, Kocina sued for wrongful detainer.

      There are two ways to evict a tenant. The first is referred to as “rent and possession”. If you don’t pay the rent, there is an expedited procedure to get you out. At trial, the only question is “Did you pay all the rent due?” If not, the judge will ask if you can pay it then and there. If you can, the case is dismissed. If you owe rent and can’t pay it that day, you’re out.

      The other way to evict a tenant is through a wrongful detainer action. This is much more involved where the landlord has to prove that you breached some provision of the lease, other than rent – too loud; failure to keep the apartment clean; too many or any pets at all. Those kinds of things.

      When a landlord has a tenant, to evict the tenant for wrongful detainer, the landlord has to give the tenant one month’s written notice. The month in question is tied to the rental period. If the rental period starts on the 15th of each month, then the landlord has to give notice before the 15th of one month and can’t evict the tenant until the 15th of the next month. If the landlord doesn’t give the tenant notice until the 16th, then he or she has to wait two months to evict.

      In the case of Tracy Johannes, she argued that the landlord didn’t give her the full 30 day notice. It turns out that in her case, it didn’t matter. The court ruled that since Tracy Johannes was not the tenant (that was her son), the landlord didn’t have to give 30 days’ notice. Tracy Johannes was not a tenant; she was just a wrongful possessor. Written notice was required, but once notice was given, a wrongful detainer action can be commenced.

      This is helpful in probate or trust matters where a brother or sister is refusing to leave the deceased parents’ home. So long as written notice is given, there’s no need to wait 30 days to commence an eviction. This is particularly helpful when the holdover is during a high utility use time of year. It is important in administering an estate for a trust to keep costs down.

Contact Fred now about your situation. The first consultation is free. Or call him now at (314) 241-3963

Overtime … Or Not

Fred Vilbig - Monday, November 28, 2016

As many of you may know, the Labor Department on May 18, 2016, issued new regulations revising the overtime rule under the Fair Labor Standards Act. Basically, the rule fairly drastically modified the definition of “white-collar” workers substantially increasing the number of “non-exempt” workers.

The rule has three parts to it. The first part is that the employee must be paid on a salary (not hourly) basis. The third part of the rule is that the employee’s duties must be professional, administrative, executive, or outside-sales in nature. The second part of the rule is tied into compensation. If the employee makes less than a set amount (currently $23,660 annually), then he or she doesn’t fall into the white-collar exemption.

What did the Obama administration did was they more than doubled the salary component. What that would mean is that an additional 4.2 million (by the Labor Department’s estimate) workers would now be hourly employees entitled to overtime pay. Conversely, they would only be paid for the hours that they actually worked. Depending on your perspective, this could be good news or bad news. The other two parts of the rule remained unchanged. The Department just raised the salary threshold.

As you can imagine, a number of employers were not happy with this change. What may be surprising is that 21 states were also upset. They all sued in federal District Court in Sherman, Texas.

All of the plaintiffs in the case asked the court to stop the implementation of the revised rule. This is an injunction. In addition, they asked that the injunction be nationwide. On November 22, the judge agreed and issued a nationwide injunction stopping the implementation of this change in the rule.

In his 20 page opinion, the judge basically said that by so radically increasing the compensation part of the test (which isn’t even mentioned in the statute), the Labor Department effectively overrode the other two components of the test, which are in fact referred to in the statute. He felt that by doing so, the Department exceeded the authority given to it by Congress.

The government can appeal this decision. It would initially have to be appealed to the Fifth Circuit Court of Appeals which has not historically been favorably disposed to the government. So the case would probably end up in the US Supreme Court.

Although appeals can sometimes be expedited, it is almost a certainty that President-Elect Trump will have been sworn in before we see that happen. Many observers believe that he will not pursue this case, or he may simply abandon it. Although I don’t think it is on his first 100-days agenda, withdrawing the entire regulatory revision is a possibility as well.

For now though, the old rule stays in place. If an employee makes less than $23,660 annually, he or she is a non-exempt employee, no matter what. If he or she makes more than that, is paid on a salary basis, and performs professional, administrative, executive, or outside-sales duties, then the employee is probably an exempt employee.

We’ll have to keep an eye on this case as time goes on.

 

Medicaid Qualification

Fred Vilbig - Thursday, September 29, 2016

Many baby boomers are finding themselves stuck between their children’s generation and that of their parents. We were recently caught in that dilemma with my in-laws. It turned out that the amount of their Social Security checks roughly equaled the premiums on their Medicare insurance. That didn’t strike me as such a good deal.

I think a lot of people are getting stuck in this conundrum. It’s a difficult place to be, and the rules governing Medicare and Medicaid are impossibly confusing. The US Supreme Court once referred to the Medicaid rules as “Byzantine construction… almost unintelligible to the uninitiated.”

Those are pretty harsh words from the Supreme Court. In my career I have done a lot of tax law. I can say that the Medicaid rules make tax law look fairly simple. However, without getting into the deep thicket of Medicaid details, I think we can break Medicaid down into two general categories.

When most people think of Medicaid, we think of the program implemented to assist financially distressed individuals to pay for their medical needs. It covers a limited number of treatments. In order to qualify, the applicant has to be financially needy in one of two ways.

The first classification of qualified applicants is those individuals who are “categorically needy.” People are “categorically needy” when they have less than $1,000 of “countable assets.” In addition, they cannot have monthly income equal to or greater than $834. Individuals who fall into this category are the people we would typically think of as Medicaid qualified.

There is, however, a second class of Medicaid beneficiaries. These individuals are referred to as “medically needy.” In Missouri (and the laws vary somewhat from state to state), “medically needy” applicants must have less than the $1,000 of countable assets. However, with regard to income, “medically needy” individuals simply must not have enough income to cover their qualified medical expenses. For instance, if the cost for a person in a nursing home is $6000 per month and they only earned $3,000 per month, Medicaid can make up the difference. That person would fall into the “medically needy” category.

In both of the classifications, there is a limitation on what are “countable assets.” Countable assets are any assets an applicant owns (or owned during the five years immediately preceding the application for Medicaid benefits where the assets were not exchanged for something of value – that is, gifts), but it excludes certain assets. For instance, a person’s house is not included in “countable assets” for qualification purposes, but the State will put a lien against the house for any Medicaid benefits paid. When the house is sold after the recipient’s death, then the State will collect any Medicaid amounts it paid out of the sales proceeds. So the exclusion of the house from countable assets is only temporary.

People for years have been trying to get around the Medicaid rules to have the government pay for their nursing home costs. When I started practicing law 35 years ago, it was pretty simple. Congress caught on, though. First, they made it illegal for grandma to transfer assets to qualify for Medicaid. If she broke the law, surely they’d put her in one of those nice prisons with good medical care. That seemed like a good option to some clients.

Congress caught on, though. So they made it a crime for family or advisors to help mom or dad plan to qualify for Medicaid. As you can imagine, this was disturbing to a lot of influential people. The concern was that it would paralyze legitimate planning for fear of violating the law. So once again, Congress caught on.

Beginning in 2006, when an individual applies for Medicaid, he or she has to add back the value of any assets transferred for less than fair market value during the immediately preceding five-year period (the “look back.”). If an asset was transferred for less than fair market value during the look back period, then the government calculates a penalty by dividing the value of the gift by a Medicaid factor. This calculation determines the number of months that the applicant will be disqualified. The disqualification basically runs from the date when the value of the applicant’s countable assets drops below the maximum permitted amount. It turns out that the disqualification can run for longer than five years. Timing an application is critical!

If a client is trying to plan for nursing home costs, there are a number of things they can do. These include long-term care insurance, annuities, and irrevocable trusts. However, this article has already gotten too long. Maybe I’ll talk about those in a future article.