Time Changes and So Do We

As years go by our physical health and family situations change. Sometimes they are gradual normal changes, such as physical abilities, and sometimes it is abrupt, such as the birth of a child or death of a spouse, or changes in laws that affect us.  Whenever these changes occur, it should make us think if we need to revise legal documents so that our legal and financial affairs are properly handled.

One example is the change in a law that permits a spouse to transfer IRA money from one spouse to another without paying income tax on the transfer. The catch is that it must be done with a court order, by agreement of both spouses. But if one spouse is incapacitated and needs Medicaid to pay for care, which is usually the reason families need to put an IRA into the healthy person’s name, then the Connecticut Power of Attorney must have a special provision to allow a court to order the transfer without triggering income tax.

Another example is if your adult child suddenly has financial, medical or martial problems. If you gave a Power of Attorney to that child, it may no longer be wise to have that child with powers over your money. The same goes for a spouse who has developed dementia and can no longer make sound financial decisions. If you have built in a backup, that may be enough. One big reason why it is not wise to put your assets into a child’s name is because that child could die, get sick, get divorced and that child cannot control any of those things and the money you put in the child’s name could be lost. That is where a trust specifically written for your family circumstances may be helpful.

Several years ago the federal Medicaid law imposed a penalty period to deny a surviving spouse Medicaid, if money was left to someone other than the surviving spouse. The laws on inheritance changed so that if the sick spouse was on Medicaid, and the healthy one died, the assets could be substantially saved if a will had been done by the healthy spouse that sends the deceased’s assets into a trust inside the will. It is called a testamentary trust. That trust requires that the income from one third of the assets be paid to the sick spouse, but the principal and the two thirds of the income stays protected. So if the family had $600,000, the income earned by $200,000 would have to go toward care for the surviving spouse, but the full $600,000 and two thirds of the income would be protected.

Another normal situation is where parents have wills or trusts that send assets to their children equally. But if a child’s marital or health status changes for the worse, it may no longer make sense to have assets going to that child directly, or it may not make sense to have that child in charge of your assets. The assets for that child should be sent to a trust for that adult child or the grandchildren to protect the assets from whatever difficulties the child may face in qualifying for Medicaid. And it may be wise to have another child or a professional handle the assets.

An example from my own family is instructive. My mother did an irrevocable trust to protect assets under Connecticut law if she needed long term care. The trust had a provision that allowed her to do a new will and change where the trust assets would go upon her death. As the years  went by, my younger brother had very serious surgery, could no longer work and he needed Medicaid to pay for care in California where he lived. The provisions in her trust allowed her to write a new will and redirect the assets to his children and not to him. That was exactly what he wanted as well, because if assets went to him after he was on Medicaid, California would have taken the assets. When she passed, his share of the assets went to his adult children and were protected.

The point cannot be emphasized enough. Documents such as wills, trusts, powers of attorney and living wills must have backup provisions so that if family circumstances change, your wishes and goals can still be carried out.