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SUCCESS STORY OF THE MONTH – SAVING THE FAMILY MINERAL INTERESTS, COSTS OF CARE AND MORE

Elderly client, whose health is declining, owns a trailer and 11 acres that is treated as his homestead presently valued at around $55,000. He also owns 60 acres of undeveloped property where he would prefer to live which is much more valuable. The only other asset is his interest in inherited mineral rights located in Oklahoma valued around $35,000 which have passed from generation to generation. His primary goal is that his children receive his mineral rights, but since he has virtually no cash assets and his health is declining he is concerned that all his assets will be liquidated to pay for his care as he has inadequate income and he has no long-term care insurance. He is a veteran who served during wartime. Here are a few of the legal issues considered and suggested actions:

1.Transfer the trailer from the present homestead to the 60 acre tract and make the 60 acre tract the homestead. 

Rationale:

  • The 60 acre tract is more valuable and if he should ever need to apply for long-term care Medicaid to help pay for the cost of care, then the homestead would not be counted as a resource as it has an equity value less than $595,000;
  • Although the homestead is subject to Medicaid estate recovery after his death should he receive long-term care Medicaid, a Ladybird deed or a Transfer on Death deed can be used to avoid a successful claim by the state since recovery is only against a homestead if it passes by Will or intestacy (no Will);
  • Veteran’s benefits are not practical in this case since there is generally a two acre limit for the homestead to be exempt under the rules for improved pension benefits, to pay for care costs, whereas there is no acreage limitation of a homestead for Medicaid benefits.
  • Sell the existing home.

2. Sell the existing home.

Rationale:

  • You can only have one homestead and the 60 acre property is more valuable;
  • The home proceeds could be used to help pay for long-term care costs during a penalty period (Medicaid has a five year look-back period if the applicant makes a gift for less than fair market value) if the mineral rights are transferred;
  • Since the homestead would have a capital gain that is worth far below the $250,000 gain limit without taxation, there is limited tax issues.
  • Transfer the Oklahoma mineral rights to children.

3. Transfer the Oklahoma mineral rights to children.

Rationale:

  • Although there will be a transfer penalty if the client should apply for long-term care Medicaid, the house proceeds could be used to purchase a Medicaid-compliant annuity to help pay the difference between his income and the cost of care during the penalty period  (which is determined by dividing the cost of care into the amount of the gift) for giving away the mineral rights;
  • If the mineral rights were not sold or given away, probate would be needed in both Texas and Oklahoma resulting in extra legal fees, court costs and delays;
  • The mineral rights have limited value, so capital gains tax and gift tax is a limited issue at best.
  • If client enters a nursing home and meets all Medicaid eligibility criterion, then he should purchase a Medicaid-compliant annuity.

4. If client enters a nursing home and meets all Medicaid eligibility criterion, then he should purchase a Medicaid-compliant annuity.

Rationale:

  • Although Medicaid has a five year look-back period, the transfer penalty is based on the value given away without adequate compensation. Thus, he could purposefully give the mineral rights (which the state would be notified) and a single premium immediate annuity would be purchased to make up the difference between his income and the cost of care during the transfer penalty period. The annuity would be calculated to expire on the same date as the transfer penalty. The annuity must meet the Medicaid rules.
  • If there is too much cash left after the sale of the existing home, purchase other (besides the annuity) exempt resources and pay bills that he might have.

5. If there is too much cash left after the sale of the existing home, purchase other (besides the annuity) exempt resources and pay bills that he might have.

Rationale:

  • The present homestead has little value, but if the homestead sells, assets such as a pre-need funeral contract could be purchased and possibly consider additional gifts if family has advanced funds for care costs.
  • Funds may be needed for unexpected events.

Results of plan if long-term care is needed in the near future:

  1. Children receive mineral rights without having to sell to pay for care.
  2. Probate is avoided in Texas and Oklahoma.
  3. More valuable property (60 acre tract) is excluded as a resource.
  4. Children will inherit 60 acre tract and avoid a successful recovery claim by the state.
  5. Income from mineral rights is in children’s names to would not be part of co-payment to the skilled nursing facility.
  6. In addition to the mineral rights there is likely to be a small amount of cash gifted due to the annuity strategy.
  7. The benefits paid by Medicaid is greater than the benefits from VA which has a three year look-back period.
  8. If Medicaid eligibility is granted, he will save approximately $4,500 a month once the annuity ceases (the difference between his income and the cost of care).

If interested in learning more, consider attending our next free “Estate Planning Essentials” workshop by calling us at (214) 720-0102 or sign up by clicking here.

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