Patricia Paruch, Kemp Klein Law Firm
How Klooster and Recent Medicaid Changes Impact Deed Planning
Robert C. Anderson, Elder Law Firm of Anderson Associates, PC
It just got a lot tougher for aging clients to plan for their real estate. In March, 2011, the Michigan Supreme Court decided Klooster v. City of Charlevoix. In April, 2011, Michigan changed its Medicaid rules to make jointly-owned non-homestead property countable. In July, 2011, Michigan implemented Medicaid Estate Recovery against homes which pass through probate. If these three changes impact a client, the recommended strategy for homes, cottages, and recreational property is some form of joint tenancy with full rights of survivorship.
The Klooster decision approved the use of joint ownership with survivorship to prevent uncapping of the taxable assessment after the death of the original owner. Other probate-avoidance methods, such as life estates, enhanced life estates with powers of sale (lady bird deeds), and deeds in trust result in an uncapping event after death of the original owner.
On April 1, 2011, Michigan's Medicaid agency changed its regulation on joint interests in non-homestead properties. Under the new regulation, a person's fractional interest in non-jointly-owned property is countable for Medicaid purposes—even if the owner owned the interest for more than Medicaid's 60-month look-back period and the other owners refuse to sell. This rule does not affect the homestead because the fractional joint interest of a home is exempt.
This problem can be solved by reducing the retained share of the aging client to 1% and increasing the non-countable share owned by a child or other loved one to 99%. The Court of Appeals in In Re: Estate of Ledwidge, 136 Mich. App. 603 (1984) approved the use of non-equal joint interests. The author has never had a problem recording an unequal joint tenancy deed. Also, a joint tenancy deed starts the 60-month Medicaid look-back, whereas deeds into revocable trusts and lady bird deeds do not.
The next Medicaid bombshell came on July 1, 2011, when Michigan implemented probate-only Estate Recovery. The primary purpose of Estate Recovery is to allow Michigan to recover its cost of nursing home Medicaid from the provisionally exempt homestead if it later passes through a probate estate.
While any probate avoidance tool would appear to work to avoid Estate Recovery, joint ownership may be the best method. A living trust cannot be used because a home in a trust loses its exempt status under Michigan Medicaid and results in property tax uncapping when the original land owner/sole trust beneficiary dies. A life estate deed, including lady bird deeds, cannot be used if the goal is to cap the freeze on the taxable assessment. Joint ownership is potentially the best solution.
Adding a loved one to the deed creates a vested interest, which can affect the title by the named party's "four Ds": divorce, debts, disability, or disharmony situation. To minimize these problems: (1) have the named loved ones sign over a limited financial durable power of attorney to the original owner(s), (2) reduce the number of named parties to one or two who then sign a sharing agreement to include other beneficiaries, and (3) have the spouse of named parties sign a waiver of marital rights agreement. To increase client understanding, we refer to this strategy as a Lion Cub Deed. The original owner client is the "lion," and the named loved one on the deed is the "cub."
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