I Do, But I Don’t-Modifying Estate Plans in the Face of Catastrophic Illness

By far, the most popular estate plan that I draft is what I refer to as the “I Love You” plan.  Husband executes a will leaving everything to wife. Wife executes a will leaving everything to husband.  Everything is left to children in equal shares when both parents die. For good measure, we title the assets jointly with right of survivorship (house, bank accounts, stocks, bonds) or designate the spouse as beneficiary (IRA’s, life insurance, annuities) so that there isn’t even a probate estate when the first spouse dies. Simple, effective and so popular that the “I Love You” plan is the one chosen by Ohio’s descent and distribution statute for those who never got around to writing a will. Why is this plan so popular? It’s because that is what most people want.

The problem comes when one spouse becomes ill or debilitated to the point he cannot care for himself. The spouse may become so ill as to require nursing home care now or in  the  future,  especially  if  the  caregiver  spouse  passes  away  first.  Then,  the  “I  Love You” plan becomes the worst of all possible plans because leaving everything to the ill spouse,  in  essence,  means  leaving  everything  to  the  nursing  home  to  pay  for  the spouse’s care. Planning ahead is essential to protect assets for the family.

Even more important than a will, which distributes assets at death, each spouse should execute  health  care  and  financial  powers  of  attorney.    These  documents,  prepared when both spouses are competent, appoint someone (usually the husband or wife with children  named  as  backups)  to  direct  medical  care  and  manage  finances  when  an individual loses capacity.

In  planning  for  potential  nursing  home  placement,  it  is  important  to  give  the  financial agent the power to transfer assets within the rules of Medicaid. With such a document, assets  can  be  moved  into  the  name  of  the  healthy  spouse  as  required  for  Medicaid qualification. To  qualify  for Medicaid, a  nursing  home  patient  can keep  only  $1500  in countable  assets.  This  is  usually  kept  in  the  checking  account  where  the  patient’s pension  and  Social  Security  checks  are  deposited.  The  healthy  spouse  may  keep
considerably  more  countable  assets  (with  a  minimum  of  $20,328  and  a  maximum  of 101,640 in 2007). These assets should be placed in the name of the healthy spouse alone “payable on death” to the children.

As long as the healthy spouse continues to live in the house, it is an “exempt” asset for Medicaid purposes regardless of which spouse’s name is on the deed. However, if the ill  spouse  is  on  Medicaid  and  passes  away  with  an  interest  in  the  house,  his  or  her share will be subject to Medicaid Recovery. A lien will be placed on the house which will be collected upon the death of the healthy spouse. Placing the house in the name of the healthy  spouse  before  a  nursing  home  admission  or  application  for  Medicaid  home waiver program may protect the house from Medicaid Recovery.

Once the house is in the name of the healthy spouse, he or she should also execute a new  will  excluding  the  ill  spouse.  If  the  healthy  spouse  should  then  die  first,  the  ill spouse would be required to elect to take only that part of the estate available under the law, preserving at least a portion of the assets for the children.

It seems only natural for most married couples to establish an “I Love You” estate plan, but the financial burdens of a catastrophic illness can quickly change both our lives and our plans. Be prepared.  Review your estate plan with your attorney every two to five years and whenever you have a major life change such as a birth, death, divorce, major illness or disability in the family. It’s the best way to say “I Love You”.

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