MAY 2024
CURRENT ISSUES IN THE AREAS OF ESTATE, TAX AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Insurance Change Affecting TOD Deeds. A new Indiana law that becomes effective for owners of property dying after December 31, 2024 will in most cases result in the homeowner’s insurance policy continuing to cover the property for the beneficiaries of a transfer-on-death (“TOD”) deed for 60 days after the owner’s death. One troubling issue affecting the use of TOD deeds is the problem that there could be a gap in coverage between the date of death of the owner of property who executed a TOD deed and the date when the beneficiaries named under the TOD deed are able to secure coverage for the property in their own names. A TOD deed is similar to signing a beneficiary designation in that, following the death of the owner of the property, the named beneficiaries in the TOD deed become the owners upon the recording of an affidavit meeting certain requisites. If the insurance company takes the position that the coverage terminated with the death of the previous owner, then there will be a gap in coverage. There would never be a problem, or at least no one would know that there was a problem, unless a claim occurred between the date of death and the date when the TOD beneficiaries secure new coverage. A similar issue arises when people establish trusts and transfer real estate to a trust. In most instances the insurance company will say that there is no problem with the coverage. However, there have been cases when coverage was denied. Transferring real estate to a trust, even a revocable trust, can not only terminate property and casualty coverage but also title insurance coverage if there is later a title insurance issue and the previous owner, who still is occupying the property, wants to make a claim under the title insurance policy. The new law in Indiana will protect the coverage in most cases for 60 days following the death of the owner, but the new law does not apply to trust transfers. When an owner signs a TOD deed, the owner can put a warning on the deed, in effect notifying the TOD designees who will become the new owners that once the 60-day period expires, the insurance policy may no longer cover the property and the property may become uninsured. The warning is not required, but I have started putting it on TOD deeds, even now, as a reminder to new owners of the importance of securing proper insurance coverage.
TOD Deeds In Planning. Since we have addressed the issue of TOD deeds, there are several planning issues that should be discussed. I like TOD deeds and use them frequently, but I generally do not encourage people to sign a TOD deed when there will be multiple owners of property following the death of the owner. While a TOD deed may make sense for parents who are transferring property to a child at death, when there are two or more children there are inherent risks due to multiple ownership. The more children there are, the greater the risks. For one thing, following the death of a parent, the multiple owners must agree on every aspect of the sale of the property, including the way of selling it, the company to be engaged for the sale, the price to be set, the terms of sale, etc., and all of them will have to sign all paperwork. If there is a per stirpital distribution used in the deed so that a deceased child’s share will pass to the deceased child’s children, then the death of a child will result in even more owners, some of whom may be minors. These situations can be frought with risks and result in much greater complications than issues relating to the probate of an estate. My general rule is that in the case of multiple TOD beneficiaries, I discourage the use of TOD deeds, but I will prepare them for clients once they are fully aware of the implications of using them. They must be willing to accept the risks. I generally do not recommend a simple revocable trust for probate avoidance in regard to a residence because of the expense involved, which can approximate the cost of probate. People can pay almost as much now to avoid probate as probate would cost after death, and probate may not even be an issue because the property may no longer be owned at the time of death. If a trust is set up for probate avoidance purposes now, and later an asset protection trust is set up, there would be the cost of an additional trust as well as the need to deed the property to the new trust, which means that the initial trust was, in effect, a waste of time and money. In summary, then, a TOD deed can be very helpful. I use them in the case of trusts frequently. By using a TOD deed so that it passes into a trust at death rather then actually transferring the property to the trust today, insurance issues can be avoided until death (the insurance issue is now obviated for a 60-day period because of Indiana’s new law relating to insurance coverage when property is conveyed by a TOD deed). There is no change in ownership, no impact on real estate taxes, and the owner(s) remain in control of the property until death or until the property is sold or transferred.
Common Asset Protection Planning Errors – Continued. In addition to the plethora of other asset protection planning problems which have been presented in previous newsletters, problems abound when people handle more complex Medicaid applications on their own or utilize some of the companies that market themselves as so-called Medicaid specialists. Many of them are not even attorneys. I have encountered innumerable problems with people who have filed their own Medicaid applications or engaged others who are not true professionals in the Medicaid application process, and I have had to clean up a number of messes. This process can be very expensive. Some of the mistakes that are made in conjunction with those Medicaid applications are very simple ones, such as not including proper authorized representative forms. If they are not included, the entire process slows down. In addition, when a qualified income trust is needed because a person’s income exceeds a certain limit called the “special income limit”, or “SIL” (a qualified income trust is also called a “Miller Trust”), a month or more of Medicaid eligibility can be missed, or a denial may result and it may be necessary to file an appeal, because the trust was not created timely or because it was not funded in a timely manner. The Family and Social Services Administration (FSSA) likes to see a trust in existence in the month prior to the effective date of Medicaid eligibility, and also likes to see that the trust was actually funded with the proper amount of income being deposited in the month prior to the filing. While this may not be required, it is not particularly problematic to do, and doing so can avoid a denial and the need to file an appeal. Even if the matter may be won through the administrative appeal process, it is not worth the additional time and cost, or the risk of eligibility delay.
Additional Information. Future issues of this newsletter will address other issues of current interest. Please contact my office with any questions that you might have.