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SUCCESS STORY OF THE MONTH – D-I-Y CAN BE D-U-M-B – OH THE MIGHTY WEB WE WEAVE!

This article is not intended to be critical, but it is merely to be an illustration of the perils that could occur when one does their own legal documents. The facts are as follows: Husband and wife own a homestead together during marriage, but they get divorced. As part of the divorce decree, husband is to transfer his interest in the property to his wife. Neither of the divorce attorneys prepare the deed (which is not that unusual since the decree is a court order which title companies often follow). The following year Husband signs a quitclaim deed without compensation to his children contrary to the court order. Husband, who has no power of attorney, then has a stroke and needs long-term care. Husband no longer has mental capacity. Husband has limited resources and limited income and no long-term care insurance and thus needs Medicaid to help pay for his care costs.  Husband’s deed and failure to have a power of attorney created the following problems:

PROBLEM NO. 1   The quitclaim deed potentially creates a transfer penalty for long-term care Medicaid.

Long-term care Medicaid has a 5- year lookback period. The transfer of his interest in the home potentially creates a transfer penalty determined by the value of the uncompensated transfer divided by the average daily cost of a nursing home in Texas. The penalty would not even begin until he is virtually destitute (less than $2000 of countable resources) and applies for long-term care Medicaid. If Husband would have simply deeded the property to his Wife pursuant to the court order, then there would be no transfer penalty since he would have been acting pursuant to a court order.

PROBLEM NO. 2 The quitclaim deed creates a cloud on title.

Even though Wife was awarded the property in the divorce, a title company would not insure title without further action due to the quitclaim deed to the children.

PROBLEM NO. 3 Even if children deeded their interest in the property back to Husband (to undo the Medicaid transfer penalty), guardianship would be needed since husband lacks mental capacity and he had no power of attorney.  If he didn’t deed back to her, then there could be argue that he had too much resources since it is not his homestead.

Guardianship would be too expensive and take too long to be a viable option. There would need to be at least 2 attorneys involved (one for the husband and one for the one who seeks guardianship). If more than one child wanted to be the guardian, then another attorney would be involved.

STEPS TO SOLVE PROBLEM:

1. Have a title search to see if a title company would say the property was in the name of wife only (in other words, the court order supersedes the action of the quitclaim deed). In this case, Chicago Title was gracious enough to do a search and underwriting did confirm that the deed created a cloud on title and what was needed to remove the cloud (see 2 and 3 below).   

2.   Get a certified copy of the divorce decree and file it the deed records in the county where the property is located.

3.  The children who received the deed must sign a special warranty (not a quitclaim) deed to wife. Title companies will not usually insure title on quitclaim deeds since such deeds have no warranty of title. Fortunately, the children are agreeable to sign the deed and the title company would accept a combination of the certified court filed in the deed records and a special warranty deed to wife.

4. Since guardianship is too expensive, the best option is to have the special warranty deed mention the error and that the deed was to correct the deed given them in error and the intent was to comply with the court order. It is anticipated that Medicaid will understand the error and comply with the court order especially since (at the time of the quitclaim deed) the husband was not ill – so it was not done for purposes of obtaining Medicaid eligibility.  Although the deed was done within the 5 year lookback period, the presumption of guilt (any uncompensated transfer being a penalized event if within the lookback period) can be overcome due to the undue hardship created if not done for the purposes of obtaining eligibility. If the husband deeded the property after he had a stroke or diagnosed with some sort of disability likely to result in the need for long-term care, then the likelihood of success would have been diminished.   

Moral: Everyone should have basic estate planning documents, and it is best to get legal advice before signing legal documents.  

If interested in learning more about this article or other estate planning, Medicaid and public benefits planning, probate, etc., attend one of our free upcoming virtual Estate Planning Essentials workshops by clicking here or calling 214-720-0102.  We make it simple to attend and it is without obligation.

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