Can Life Insurance Affect Your Medicaid Eligibility?

In order to qualify for Medicaid, you can’t have more than $2,000 in assets (in most states). Many people forget about life insurance when calculating their assets, but depending on the type of life insurance and the value of the policy, it can count as an asset.

Life insurance policies are usually either “term” life insurance or “whole” life insurance. If a Medicaid applicant has term life insurance, it doesn’t count as an asset and won’t affect Medicaid eligibility because this form of life insurance does not have an accumulated cash value. On the other hand, whole life insurance accumulates a cash value that the owner can access, so it can be counted as an asset.

That said, Medicaid law exempts small whole life insurance policies from the calculation of assets. If the policy’s face value is less than $1,500, then it won’t count as an asset for Medicaid eligibility purposes. However, if the policy’s face value is more than $1,500, the cash surrender value becomes an available asset.

For example, suppose a Medicaid applicant has a whole life insurance policy with a $1,500 death benefit and a $700 cash surrender value (the amount you would get if you cash in the policy before death). The policy is exempt and won’t be used to determine the applicant’s eligibility for Medicaid. However, if the death benefit is $1,750 and the cash value is $700. The cash surrender value will be counted toward the $2,000 asset limit.

If you have a life insurance policy that may disqualify you from Medicaid, you have a few options:

• Surrender the policy and spend down the cash value.
• Transfer ownership of the policy to your spouse or to a special needs trust. If you transfer the policy to your spouse, the cash value would then be part of the spouse’s community resource allowance.
• Transfer ownership of the policy to a funeral home. The policy can be used to pay for your funeral expenses, which is an exempt asset.
• Take out a loan on the cash value. This reduces the cash value and the death benefit, but keeps the policy in place.

Before taking any actions with a life insurance policy, you should talk to your attorney to find out what is the best strategy for you.   To discuss elder law issues with an attorney, please call the Elder Law Center at 630-844-0065 or contact us via email. The Elder Law Center is located in Aurora, IL, Kane County, in the Chicago Western Suburbs.

Was James Gandolfini’s Will a Mistake?

Recently deceased actor James Gandolfini is reported in the New York Daily News of having a $70 million estate for which a federal estate tax of approximately $30 million will be due in large part to his generosity to family and friends. In the article, at least one commentator characterizes this as a tax “disaster.” You can read Mr. Gandolfini’s will, which he executed this past December, by clicking here.

The Plan

Mr. Gandolfini makes specific gifts totaling $1.6 million to various friends and family members, gives his property in Italy to his son and daughter, and then divides the rest of his estate, 30 percent to each of his two sisters, and 20 percent each to his wife, Deborah Lin, and daughter. He also created a trust for his son reported to be funded by a $7 million life insurance policy, which will not be subject to estate tax. It’s somewhat unusual that a celebrity would make his estate plan so public, since it could have been kept private through the use of a revocable trust.

Estate Taxes

Under the federal estate tax structure, funds going to a spouse or into a properly-structured trust for her benefit are not subject to estate tax. But assets above $5.25 million passing to others are subject to a 40 percent tax, plus any New York State estate taxes that may be owed. These taxes are due within nine months of the date of death, which may require selling property quickly if the estate does not hold sufficient assets in liquid form.

Even though Ms. Lin’s share of her husband’s estate is not subject to estate tax, the way the plan is structured her share will be calculated after the taxes are paid, so she will receive less and the estate will pay more. It’s something of a circular calculation that is easiest completed by computer programs.

Second Marriage

One of the reasons Mr. Gandolfini structured his estate in this fashion, no doubt, is because it is a second marriage. If he was still married to his first wife, he would be more likely to have provided that the bulk of his estate go to her, minimizing estate taxes, and relying on her to take care of their children, if perhaps not his sisters. Of course, there’s always the risk of remarriage, and money and assets leaving the family entirely.

An Alternative Approach

Another approach would have been to limit taxes by leaving funds and property for Ms. Lin, with her receiving only the income during her life, the balance going to his children and sisters upon her death. This would have probably meant a long wait for them, perhaps forever for the sisters who might not live as long as Ms. Lin. A balance — some funds going to the sisters directly today and some later — might have been the optimal plan.

More Life Insurance?

Another approach would have been to do for his sisters and daughter what Mr. Gandolfini apparently did for his son. According to the press reports, he purchased a $7 million life insurance policy owned by a trust outside of his taxable estate. While this, undoubtedly, required large premium payments during Mr. Gandolfini’s life, it would have meant tax-free inheritances for his sisters and daughter.

Was It Really a Mistake?

While some commentators have characterized Mr. Gandolfini’s plan as a mistake due to the large amount of taxes due, I’m not so sure. Mr. Gandolfini may have been advised and totally aware of the tax consequences of his plan. He alludes in his will to providing for his wife in other ways, perhaps through gifts he has already made or joint property that will pass to her free of estate taxes. He very well may have decided that life will be simpler and less entangled if his sisters receive their shares outright rather than have to wait ghoulishly for their sister-in-law’s death.  After all, even after paying estate taxes they’ll each take home approximately $12 million. That’s still a lot of money. (Of course, some extra planning steps could have been taken to prevent a large portion of these funds from being taxed again when the sisters pass away.)

Remember, until the popularity of The Sopranos which first started airing in 1999, Mr. Gandolfini was not a wealthy man. To be able to leave a $40 million estate after taxes would have been unthinkable until recently. He was also only 51 years old when he executed his last will. He must have thought he had many more years to fine-tune the plan and perhaps do more estate tax planning. We have seen many clients with complicated plans that have proved useless as the tax code or their circumstances have changed. While we may have urged Mr. Gandolfini to have taken some more planning steps, I don’t think we can fault him or his attorney for not having done so yet.

Harry S. Margolis is the founder and president of ElderLawAnswers and a principal with the elder law firm of Margolis & Bloom in Boston, Massachusetts.

For articles in the The New York Times and Forbes evaluating Mr. Gandolfini’s estate plan, click here and here..

To discuss elder law issues with an attorney, please call the Elder Law Center at 630-844-0065 or contact us via email. The Elder Law Center is located in Aurora, IL, Kane County, in the Chicago Western Suburbs.