It’s been a while since we’ve had a listener question episode!
Medicaid Estate Recovery and Powers of Attorney
This week, John has a scary listener question about a blended family situation. The person who contacted John was a widower. His late wife has children, who are now challenging the steps he took when caring for her financial affairs.
The wife needed long-term care, and they had gotten some advice from an attorney. The attorney suggested that they transfer their marital home, which was her separate property, to his name. This is pretty common – you transfer the home from the institutionalized spouse to the community spouse in order to preserve the property without jeopardizing eligibility for Medicaid or being subject to Medicaid estate recovery.
The wife also had some separate assets that she brought into the marriage. The recommendation was to take her assets and turn it into a single premium immediate annuity, and have the income of the annuity assigned to the husband.
These two steps would impoverish the spouse who needs the Medicaid by shifting assets to the other spouse. This is a relatively standard Medicaid plan.
The wife was physically frail but mentally competent. Therefore, the other recommendation was to get some powers of attorney in place first, so that the husband could do all these transactions on her behalf. They did that, she appointed her husband to be able to do all these things, and then , and the husband transferred her assets so that she could be eligible for Medicaid coverage. This worked, and the wife did receive Medicaid benefits, and she did pass away.
He is being sued by her children. They are saying that he did not have the power to do the things he just did. It all comes down to the power of attorney. The things that people don’t realize is that just doing a power of attorney doesn’t give that person unlimited powers. Generally speaking, there are some things that you can not do.
One of the things that you usually can not do is gifting assets. In most situations, a power of attorney is designed to allow someone to take actions to benefit the person who granted the power. Gifting assets doesn’t benefit the grantor, so it is generally not permitted.
On top of that, if the person you’re transferring those assets to is yourself, then this is known as “self-dealing.” “Self-dealing” is doing transactions that benefit the person doing them.
Now, you can give someone the power to gift assets, and you can give someone the power to do transactions that benefit the person doing the transaction. You just have to make sure that the language in the power of attorney is exactly correct, and make sure that the power of attorney is clearly executed, with the right signatures and the initials in all the right place.
Now, this couple had the right information in the power of attorney, but there was a set of initials missing. And so, chances are the husband is going to lose the case being brought against him by his late wife’s children. (Though the husband may have a case against the lawyer that helped them with the power of attorney.)
Then, Devin has a few Social Security questions to answer.
Social Security Earnings Limit
The first question is about the Social Security earnings limit. That’s the limit on how much you can earn without impacting your Social Security benefits, when you’re still less than full retirement age. It gets a little confusing because in some places the Social Security administration refers to an annual limit, and in other places it refers to a monthly limit. This can cause some confusion for folks, especially if you have folks that might have a large month of income, but not necessarily enough to exceed the annual limit.
If you exceed the limit, your Social Security benefit is reduced by $1 for every $2 that you earn.
Not everyone retires on December 31st. If you work for the first part of the year, and you’ve already exceeded the annual limit, that’s OK, because that’s where the monthly limit comes into effect.
In a grace year, the annual limit doesn’t apply, and it is actually the monthly limit that applies. You take the annual limit, and you divide it by 12 to get a monthly limit. A grace year is the first year in which you have one month of earnings that are under the income limit. (Those months are called “non-service months.”) In that grace year, as long as you don’t exceed the monthly income limit, then your benefits are not impacted.
Here’s where it becomes a problem: Often folks will get one more surprise check that comes in after they’ve technically retired. It’s within the amount of the annual limit, but it is over the monthly limit. So, which limit applies? Devin can’t get any of this technical experts at the Social Security Administration to give him a clear answer. What Devin has found is that when you are in the grace year, and your earnings exceed the monthly amount, even if they don’t exceed the annual amount, the monthly limit does seem to apply.
Make sure you understand that monthly income limit could have an effect. You need to make sure you’re not going to exceed that monthly income limit. Generally speaking, if you are going to start taking benefits, and then you are going back to work or receive some other income, you need to make sure that you voluntarily suspend your benefits. The Social Security will eventually come back and withhold the money at some point in the future.
Social Security Myths
Then, Devin got question that has a couple of big Social Security myths in it. Devin’s not going to answer the question, but he will address two common myths that were listed in the question. These myths are pervasive: Devin has an entire YouTube channel about Social Security, and you see a lot of these myths in the comments.
Myth: Social Security is in trouble because the government has “raided” the trust fund.
Here’s the way it works: Any revenue that is generated, through taxes, goes to the treasury. Social Security benefits are paid from the treasury. Anything that is remaining is returned to the Social Security trust fund in the form of special treasury bonds. Many people claim that these treasury bonds are “worthless IOUs.”
Sitting in that trust fund, currently, is about 2.9 trillion dollars. When you dig into the numbers, those “worthless IOUs” that people are complaining about have put about 1.9 trillion in interest over the years. If the trust fund wasn’t invested in those treasury bonds, then the trust fund would only have about 1 trillion dollars in it.
So, when we talk about the government “raiding” the trust fund, that “raiding” is actually providing benefit to the trust fund.
Myth: Illegal immigration is affecting Social Security.
Devin says, the only way to receive a Social Security benefit is to pay into the system, and you must pay into it with a valid Social Security number, and you have to receive benefits using that same valid Social Security number. In the year 2015, the office of the inspector general did a study and discovered that 12 BILLION dollars had been paid into the Social Security system by illegal immigrants. That money goes into the system, and it doesn’t get matched up to a Social Security number, and so it goes into the earnings suspense file, which is directly helping to bolster the system.
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