Pauperization?

[confused468]

What is the name of your state? Illinois.

A friend of the family is an attorney, and we went to him for advice on this issue. But he's completely flaking out on us, and I'm not sure where to go from here, so I'm hoping for some advice here. I'm trying to make this post as short as possible, so if I leave out anything you need to know to help me out, please just let me know.

My grandmother has a good deal of money. A house valued at around $350,000, and around $400,000 in cash, plus some stocks. She recently had to go into a nursing home, but she's not that physically sick--she could easily live another 10-20 years.

She doesn't want this money to all be wasted on the nursing home and leave us with no inheiritance, so she was planning on paying off our mortgage. The lawyer friend said she could do so without penalizing either her or us by filing something with her taxes called a lifetime gift exemption. My first question is if this is true, and if so, can an accountant handle that or do we need a tax attorney to file her taxes that year? FWIW, the amount she'd be giving us to pay off our mortgage would be about $190,000.

The second, and more important, question is about something else the lawyer friend brought up as a way to save her some money. He said we could do something called pauperizing her, which would mean she'd basically sell her house and then give all her money to us. Then we'd pay the nursing home bill for 5 years, then apply for Medicaid to pay for the rest.

I have two issues regarding this that I have questions about--the first one is basically is this true? Is this something we can legally do? And if so, how do we go about it?

The second issue is regarding her house. My grandmother is a widow, and the house is paid off. But when my grandfather's brother came to live with her after my grandfather died, she put his name on the house. The brother has been in a nursing home himself for a long time, and is actually in hospice care now (all of which is self-paid at the time, but he'll be out of money in about 4 months and has already been approved for Medicaid). But the lawyer said we can't sell the house until the brother dies. Is this true?

Thanks in advance!

[abezon]

Basically all correct.
Gram can give her money to you. She will have to file a gift tax return, but won't pay any gift taxes. She'll just use up a chunk of her $1M lifetime gift exemption. Any EA or tax accountant should be able to handle the form -- it's pretty straightforward. Don't pay more than a couple hundred bucks.

Pauperizing is when a well-off old person gives away all their assets so they qualify for medicaid & the gov't pays for their care. Medicaid, being wise to this trick, has a rule that you lost eligibility for medicaid when you gift more then about $9,000 per month. When someone gifts a large sum, medicaid takes the total gifts, divides by the monthly allowed maximum, & the person cannot receive medicaid benefits for that many months. For example, $90,000 of gifts would make her ineligible for medicaid benefits for about 10 months. Pauperizing protects inheritances for heirs, but puts the donor at risk of the medicaid system, especially if the 'heirs' don't then kick in $$ to supplement the medicaid benefits. It should only be done when the recipients are highly trusted & unlikely to lose the assets to things like debt collectors or bad investments. Some form of irrevocable trust might be better if there is any doubt.

If someone else's name is on the title to the house, both signatures are needed to sell it free & clear. Also, medicaid will put a lien on the house for both owner's benefits. Depending on how long brother has been on title, he might be able to reverse the transfer without triggering medicaid issues. Ask the lawyer for clarification. It might be worth losing medicaid eligibility for a few more months & selling the house now.

You didn't say what the lawyer's specialty is. If he's not an estate planner or wealth preservation specialist, find someone who is. This is a very technical area. Since gram has $400k cash, she can afford it!

[confused468]

Thank you so much for your reply. I was worried that since my lawyer friend was flaking out on us so badly that maybe his advice wasn't accurate. I'm glad that it seems like we'll be able to save some of my grandmother's money, which she's really been worried about.

Regarding the sale of the house--you say that both people who are on the title have to sign in order to sell it. But my uncle is dying and is completely incompetent to make any decisions. Can I just sign for him, since I have POA over his medical and financial affairs? Also, there is currently no lien against the house, because he hasn't actually gone on Medicaid yet--he's been approved, but we have to spend down his checking account first. And it's highly unlikely he'll live long enough for that to happen.

Regarding the pauperization and the $9,000 dollar limits--if we pauperize my grandma, then simply pay all her bills for 5 years, then apply for Medicaid at that time, they'll never know she had all that money, right? Because they can only look back five years, right? Or will they still somehow know about all that and be able to penalize her at that time?

[abezon]

If you have POA, you can probably sell the house, as long as doing so is in Uncle's best interests. The fact that it helps gram cannot be a factor in your decision as attorney-in-fact to sell.

Find a non-flakey lawyer for medicaid specifics. My level of knowledge is info vaguely remembered from some continuing legal education seminars a few years ago. I know what some of the basic issues were back in 2000. There have been a few changes since then!

Shortly after attending the seminars, I decided that estate planning was slightly less interesting to me than watching cement set. Find someone who actually thinks it's fun.