The stretch IRA concept is a wealth-transfer strategy that can help you extend the period of tax-deferred earnings on your retirement assets. After the owner of the IRA dies, the beneficiaries will also have the longest allowable period of tax-deferral on the required distributions of the IRA assets. This strategy can allow distributions from your retirement assets to be extended over several generations. Because of this, your family could save significant dollars in income taxes over their lifetimes.
A stretch IRA strategy can be established at any time, as long as you have named an individual person as the beneficiary. It's also important to name an individual person as a contingent beneficiary in case your primary beneficiary predeceases you. If set up correctly, your beneficiaries should be able to take their required IRA distributions over their individual life expectancies.
However, there are a number of steps that need to be followed to put this strategy in place. These steps include the following:
1. Selection of individual beneficiaries.
As previously mentioned, you will need to designate an individual beneficiary. Although there might be certain reasons for naming a trust as a beneficiary (e.g., asset protection for the beneficiaries), you should keep in mind that you will jeopardize the ability to use this strategy if you do it. Even with a qualified trust, distributions must be paid out over the life expectancy of the oldest beneficiary. With this in mind, you could jeopardize you ability to stretch out distributions to your grandchildren if you name a trust as the beneficiary.
2. Discuss your plans with an experienced advisor.
The benefits of this strategy could also be jeopardized if the IRA is not set up properly. Therefore, you need to speak with an experienced tax advisor who has worked with this strategy before.
3. Establish and maintain separate accounts for your beneficiaries.
If you have two or more beneficiaries, you need to set up a separate account for each one of them. You should also designate a certain percentage of you IRA assets to each of your beneficiaries. By doing this, each beneficiary can then choose to have their share distributed over their individual life expectancy.
4. Inform your beneficiaries of your plans.
You should also let your beneficiaries know about their future interest in your account when you pass away.
There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution (50% of the distribution that should have been taken).
On a final note, it should be remembered that this strategy may not be suitable for everyone. For example, if you think that you will need access to your IRA money to meet your daily living needs during retirement, then this strategy might not help you. Please note I always advise people to consult with their own qualified legal advisor prior to making any decisions.
Do you want to know more about the benefits and restrictions of the stretch IRA strategy? Email or Call me.
Sunday, March 1, 2009
Stretch IRA - How Your IRA Can Survive Several Generations
Tuesday, February 24, 2009
Asset Protection
For the client who needs to protect assets, estate planning may include the use of asset protection trusts (such as foreign-situs trusts) that will put assets safely out of reach. Although there are potentially many reasons to use such vehicles, their use is not for everyone; many factors must first be considered. This article explores the world of the "Integrated Estate Planning Trust," discusses why and when it is used and offers a model planning structure.
INTRODUCTION
Today, asset protection planning is generally a concept familiar to wealth-planning professionals worldwide. However, while it has become more familiar and accepted, too often, such planning is done in a vacuum and without regard for its effect on the client's overall estate plan.
The same can be said for conventional estate planning; the emphasis tends to be on tax mitigation at death, the smooth transition of property, probate avoidance and ensuring that intended beneficiaries receive the intended property in the intended fashion. Unfortunately, the lifetime side of the estate plan has typically been ignored particularly, planning to preserve the client's estate during his life.
The collective thinking of the planning community has evolved tremendously over the past 10 years. The time has come for asset protection planning and estate planning to be joined into a new concept-integrated estate plan(ning) (IEP).
ASSET PROTECTION PLANNING
Asset protection planning recognizes the fact that preservation and protection of a client's estate during his life is at least as important (and in the view of many, more important) than preserving and protecting it after death.
The financial uncertainties stemming from (1)engaging in business or a profession or (2) being an entrepreneur or property owner and (3) economic and social factors have caused many successful people to adopt strategies to safeguard their accumulated wealth. A number of factors have contributed to the growing interest in and recognition of the asset protection component of the overall IEP. These factors include: (1) expanding theories of legal liability, (2) threat of litigation, (3) result-oriented judges and juries, (4) the unavailability of affordable, adequate or appropriate insurance coverage, and (5) the continuing national increase in the volume of litigation. Of course, other reasons may serve as motivating factors to persons of means who reside in (or who have assets) in other jurisdictions, as discussed below.
DEFINITION
Asset Protection Planning may be defined as the process of organizing assets and affairs in advance so as to safeguard them from loss or dissipation.
Stated another way, wealth may be more or less vulnerable to risk, depending on the nature of the property and the manner in which the property is held. Thus, at least in part, the asset protection component of the IEP will involve reorganizing the manner in which property is held so that it is less vulnerable to threats than it otherwise would be (e.g., converting joint tenancy property to a tenancy by the entirety or placing property in trust for the benefit of third parties or the settlor).
Asset protection planning is broader than simply planning for the possibility of future litigation. Clients will be motivated to plan for different reasons, not necessarily tied to the possibility of litigation. Thus, a client in a civil-law jurisdiction may desire to achieve "testamentary freedom" and avoid the forced heirship provisions applicable in his home country; a client residing (or with assets) in a politically or socially volatile part of the world may seek to protect his accumulated wealth from the various threats posed by such instability. However, the asset protection component of an IEP is not to be used to:
Hide Assets
Planning to or "hiding" assets can be dangerous; the dangers arise from the likelihood that a client will have to choose between protecting assets and committing perjury if he becomes involved in litigation. Whether or not litigation ever arises, a client may face difficult decisions each year when the client's Form 1040; full disclosure on a return is inconsistent with planning based on concealing assets. Further, hiding assets may result in criminal prosecution. Finally, the tangled web that often results from such planning is inconsistent with the goal of creating a user-friendly IEP.
While many clients appreciate the confidentiality that can be obtained through an IEP, a proper plan will not rely on secrecy for its efficacy.
Defraud creditors
There is some uncertainty as to when asset protection planning can be implemented (and the extent to which it can be implemented, if at all) when a client has a pending or expected legal threat. This uncertainly is much less prevalent today that in the past.
The easy clients are those with neither pending nor threatened claims who seek to protect against the unexpected. The difficult clients are those on the brink of bankruptcy (although pre-bankruptcy planning may help). There is a vast gray area in between.
Fraudulent conveyance law varies by state; there is also some Federal fraudulent conveyance law. A statutory body of fraudulent conveyance law applicable to certain situations exists at the federal level as well. For the good of the client and the planner as well, any asset protection planning must be implemented within the bounds of propriety as defined by reference to applicable fraudulent conveyance law.
Our common-law system favors the free alienability of property; an individual without creditor concerns is free to dispose of his property as he sees fit, whether in the form of charitable gifts or gifts to children, to a spouse or in trust. Fraudulent conveyance laws tend to focus not on who is the transferee, but on the transferor's intent at the time of the transfer.
Fraudulent conveyance law generally protects present creditors and subsequent creditors from transfers made by a person who is (or foreseeably will become) their debtor. However, "subsequent creditors" does not include every person who becomes a creditor in the future; there is also a "future potential" class of creditors. The distinction is clarified by a Florida decision, 1 which stated that asset transfers are permissible as to one's possible creditors, but not as to one's probable creditors. The operative inquiry is whether the client has any outstanding judgments, and whether he has any litigation or investigations pending, threatened or expected 2.
Evade Taxes
Some U.S. clients and their advisors are attracted to foreign-based planning by hoped-for tax advantages. As relatively few tax maneuvers involving foreign entities exist today for the global investor, a well designed IEP will have no particular income, gift or estate tax advantage other than those that can be accomplished through "conventional" inter vivos or testamentary planning. Importantly, a well-designed IEP will have no particular income, gift, excise, or estate tax disadvantages either, whether from the domestic or foreign standpoint. Both the planner and the client should be aware on an ongoing basis that certain tax issues will exist in the IEP setting. These tend to be not much different from (nor much more involved than) those associated with other types of entities than clients and planners are familiar with. Although there may be additional government reporting obligations (depending on the nature and design of the overall planning structure), neutrality in terms of tax liability will therefore generally prevail under an IEP.
INTRODUCTION
Today, asset protection planning is generally a concept familiar to wealth-planning professionals worldwide. However, while it has become more familiar and accepted, too often, such planning is done in a vacuum and without regard for its effect on the client's overall estate plan.
The same can be said for conventional estate planning; the emphasis tends to be on tax mitigation at death, the smooth transition of property, probate avoidance and ensuring that intended beneficiaries receive the intended property in the intended fashion. Unfortunately, the lifetime side of the estate plan has typically been ignored particularly, planning to preserve the client's estate during his life.
The collective thinking of the planning community has evolved tremendously over the past 10 years. The time has come for asset protection planning and estate planning to be joined into a new concept-integrated estate plan(ning) (IEP).
ASSET PROTECTION PLANNING
Asset protection planning recognizes the fact that preservation and protection of a client's estate during his life is at least as important (and in the view of many, more important) than preserving and protecting it after death.
The financial uncertainties stemming from (1)engaging in business or a profession or (2) being an entrepreneur or property owner and (3) economic and social factors have caused many successful people to adopt strategies to safeguard their accumulated wealth. A number of factors have contributed to the growing interest in and recognition of the asset protection component of the overall IEP. These factors include: (1) expanding theories of legal liability, (2) threat of litigation, (3) result-oriented judges and juries, (4) the unavailability of affordable, adequate or appropriate insurance coverage, and (5) the continuing national increase in the volume of litigation. Of course, other reasons may serve as motivating factors to persons of means who reside in (or who have assets) in other jurisdictions, as discussed below.
DEFINITION
Asset Protection Planning may be defined as the process of organizing assets and affairs in advance so as to safeguard them from loss or dissipation.
Stated another way, wealth may be more or less vulnerable to risk, depending on the nature of the property and the manner in which the property is held. Thus, at least in part, the asset protection component of the IEP will involve reorganizing the manner in which property is held so that it is less vulnerable to threats than it otherwise would be (e.g., converting joint tenancy property to a tenancy by the entirety or placing property in trust for the benefit of third parties or the settlor).
Asset protection planning is broader than simply planning for the possibility of future litigation. Clients will be motivated to plan for different reasons, not necessarily tied to the possibility of litigation. Thus, a client in a civil-law jurisdiction may desire to achieve "testamentary freedom" and avoid the forced heirship provisions applicable in his home country; a client residing (or with assets) in a politically or socially volatile part of the world may seek to protect his accumulated wealth from the various threats posed by such instability. However, the asset protection component of an IEP is not to be used to:
Hide Assets
Planning to or "hiding" assets can be dangerous; the dangers arise from the likelihood that a client will have to choose between protecting assets and committing perjury if he becomes involved in litigation. Whether or not litigation ever arises, a client may face difficult decisions each year when the client's Form 1040; full disclosure on a return is inconsistent with planning based on concealing assets. Further, hiding assets may result in criminal prosecution. Finally, the tangled web that often results from such planning is inconsistent with the goal of creating a user-friendly IEP.
While many clients appreciate the confidentiality that can be obtained through an IEP, a proper plan will not rely on secrecy for its efficacy.
Defraud creditors
There is some uncertainty as to when asset protection planning can be implemented (and the extent to which it can be implemented, if at all) when a client has a pending or expected legal threat. This uncertainly is much less prevalent today that in the past.
The easy clients are those with neither pending nor threatened claims who seek to protect against the unexpected. The difficult clients are those on the brink of bankruptcy (although pre-bankruptcy planning may help). There is a vast gray area in between.
Fraudulent conveyance law varies by state; there is also some Federal fraudulent conveyance law. A statutory body of fraudulent conveyance law applicable to certain situations exists at the federal level as well. For the good of the client and the planner as well, any asset protection planning must be implemented within the bounds of propriety as defined by reference to applicable fraudulent conveyance law.
Our common-law system favors the free alienability of property; an individual without creditor concerns is free to dispose of his property as he sees fit, whether in the form of charitable gifts or gifts to children, to a spouse or in trust. Fraudulent conveyance laws tend to focus not on who is the transferee, but on the transferor's intent at the time of the transfer.
Fraudulent conveyance law generally protects present creditors and subsequent creditors from transfers made by a person who is (or foreseeably will become) their debtor. However, "subsequent creditors" does not include every person who becomes a creditor in the future; there is also a "future potential" class of creditors. The distinction is clarified by a Florida decision, 1 which stated that asset transfers are permissible as to one's possible creditors, but not as to one's probable creditors. The operative inquiry is whether the client has any outstanding judgments, and whether he has any litigation or investigations pending, threatened or expected 2.
Evade Taxes
Some U.S. clients and their advisors are attracted to foreign-based planning by hoped-for tax advantages. As relatively few tax maneuvers involving foreign entities exist today for the global investor, a well designed IEP will have no particular income, gift or estate tax advantage other than those that can be accomplished through "conventional" inter vivos or testamentary planning. Importantly, a well-designed IEP will have no particular income, gift, excise, or estate tax disadvantages either, whether from the domestic or foreign standpoint. Both the planner and the client should be aware on an ongoing basis that certain tax issues will exist in the IEP setting. These tend to be not much different from (nor much more involved than) those associated with other types of entities than clients and planners are familiar with. Although there may be additional government reporting obligations (depending on the nature and design of the overall planning structure), neutrality in terms of tax liability will therefore generally prevail under an IEP.
Sunday, February 15, 2009
Why should I go to the trouble of planning my estate and writing a will?
Estate planning pays real dividends—in results achieved, in dollars saved, and, most important, in security and peace of mind. And it doesn't have to be expensive, traumatic, or even especially time consuming.
An estate plan is your blueprint for where you want your property to go after you die. Estate planning lets you do the following:
• Determine what happens to your property—who, what, when, and how. It enables you to coordinate gifts in your lifetime with bequests in your will or trust. You can apportion property among your family members, your friends, and charities that are important to you. If you don't have a will or a trust, state law will step in and determine how to dispose of your property, in ways that you might not intend.
• Determine who will be in charge of carrying out your wishes—your executor if you have a will, and your trustee if you have a trust.
• Save money on probate, taxes, and other expenses of settling an estate.
• Be in control of your own life. A living trust can provide a way to manage your property should you become disabled. A living will or a health-care advance directive can set up a plan for your medical care, should you no longer be able to make decisions for yourself.
• Coordinate estate planning with other kinds of financial planning. For example, the new tax law has made significant changes in incentives to save for education, making this an ideal time to look into planning for the education of children and grandchildren, as well as other financial issues.
• Decide whether your business will be sold or stay in the family—and if it stays in the family, who will run it.
An estate plan is your blueprint for where you want your property to go after you die. Estate planning lets you do the following:
• Determine what happens to your property—who, what, when, and how. It enables you to coordinate gifts in your lifetime with bequests in your will or trust. You can apportion property among your family members, your friends, and charities that are important to you. If you don't have a will or a trust, state law will step in and determine how to dispose of your property, in ways that you might not intend.
• Determine who will be in charge of carrying out your wishes—your executor if you have a will, and your trustee if you have a trust.
• Save money on probate, taxes, and other expenses of settling an estate.
• Be in control of your own life. A living trust can provide a way to manage your property should you become disabled. A living will or a health-care advance directive can set up a plan for your medical care, should you no longer be able to make decisions for yourself.
• Coordinate estate planning with other kinds of financial planning. For example, the new tax law has made significant changes in incentives to save for education, making this an ideal time to look into planning for the education of children and grandchildren, as well as other financial issues.
• Decide whether your business will be sold or stay in the family—and if it stays in the family, who will run it.
Sunday, February 1, 2009
Letter to Your Spouse
By Parag Patel, Esq.
In addition to your estate planning, it's a good idea to have a non-binding letter to your spouse, children and other heirs outlining where the important documents are kept and who to contact for help in administering your estate.
The following example is meant to be given to your spouse. Edit it to suit your needs. Your loved ones will feel more secure knowing the complete financial picture and having all the information in one place. Place copies in a safe location and be sure everyone knows where to find the letter.
Letter to My Spouse
Dear Spouse,
As we have discussed, you should use this letter (which is not to be misconstrued as my will) after my death or serious disability to serve as a reminder about a number of matters. The purpose is to make your task of handling legal and financial matters easier.
Our attorney and our accountant have significant personal information. Their names and direct phone numbers are ______________________________________________.
Safety deposit box. Our safety deposit box is in both our names and contains papers that you will find useful at the time of my death. You will also find my Will, copies of my birth certificate, and other valuable items. The box is located at __________________. The number of the box is _____________________. You will find my key to the box in ___________________________.
Will. The original of my Will is in our safe deposit box at the bank. You have received a copy of my will and an additional copy is in ________________.
Executors. I have appointed _______________________ and ___________________ to serve as co-executors of my estate. They will handle most of the legal and financial matters but will need your assistance.
Funeral arrangements. As we have discussed, here are my instructions for a funeral _______________________________________________________.
Credit cards. Please destroy all the credit cards in my name except those that are issued jointly to both of us. You do not want to be burdened with the problems of improper use of my cards.
Brokerage house. Please call my securities broker ________________ at _____________ and instruct him to nullify my standing or special instructions. Follow this with a written confirmation. After the accounts are transferred to your control, you can act as you wish.
Life insurance. My life insurance policies are in my __________________. Our life insurance agent is __________________ and his telephone number is ___________________. He will assist you in obtaining and completing claims forms so that you can promptly begin collecting these benefits.
Personal financial statement. Attached to this letter is an updated personal financial statement that is a bit more detailed in describing the stocks, real estate, partnerships, bank accounts and other investments we have made. When you read this, you will have a good handle on all our investment decisions. I suggest that you consider employing ____________, who I have consulted with from time to time as an investment adviser.
Casualty insurance. The policies that we have on our home, automobiles and other property have been purchased through _________________, whose telephone number is __________________. Be sure that none of the policies are permitted to lapse.
Home. Our home will continue to be owned by you and full title will pass to you outside of the probate court. Our deed and policy of title insurance are held in ________________.
Automobiles. All of our vehicles are registered in both of our names. Registration papers are in _____________________.
Loans. In addition to the loans we have on our real estate, which are represented by notes and deeds of trust, the policies of title insurance and deeds are in _________________. Please give your attention to that account with the advice of our estate-planning adviser. The circumstances will change because everything I own will take on a new tax basis at the time of my death. Accordingly, you have a new set of circumstances to deal with regarding income taxes on any asset sales after my death.
Tax Returns. Copies of our tax returns for the past 10 years are located in _______________. You can also contact our accountant for copies of returns filed in recent years.
Pension Plan. We have a substantial amount in a pension plan. The name and address of the plan administrator is _____________. I have been dealing primarily with __________________ whose telephone number is _______________. If the administrator is not clear about what our benefits are, consult with our estate-planning adviser.
Miscellaneous. Until my estate is settled, you should keep careful records of all checks you receive, as well as what you spend. Turn over all checks made out to me, or in our joint names, to our executor. (Checks made out to you alone may be deposited or cashed by you as always.) You can continue to use our joint bank account if you wish. Keep a record of all bills paid. As questions come up, my executor or estate-planning adviser is available to consult with our family.
Love,
Your Spouse
In addition to your estate planning, it's a good idea to have a non-binding letter to your spouse, children and other heirs outlining where the important documents are kept and who to contact for help in administering your estate.
The following example is meant to be given to your spouse. Edit it to suit your needs. Your loved ones will feel more secure knowing the complete financial picture and having all the information in one place. Place copies in a safe location and be sure everyone knows where to find the letter.
Letter to My Spouse
Dear Spouse,
As we have discussed, you should use this letter (which is not to be misconstrued as my will) after my death or serious disability to serve as a reminder about a number of matters. The purpose is to make your task of handling legal and financial matters easier.
Our attorney and our accountant have significant personal information. Their names and direct phone numbers are ______________________________________________.
Safety deposit box. Our safety deposit box is in both our names and contains papers that you will find useful at the time of my death. You will also find my Will, copies of my birth certificate, and other valuable items. The box is located at __________________. The number of the box is _____________________. You will find my key to the box in ___________________________.
Will. The original of my Will is in our safe deposit box at the bank. You have received a copy of my will and an additional copy is in ________________.
Executors. I have appointed _______________________ and ___________________ to serve as co-executors of my estate. They will handle most of the legal and financial matters but will need your assistance.
Funeral arrangements. As we have discussed, here are my instructions for a funeral _______________________________________________________.
Credit cards. Please destroy all the credit cards in my name except those that are issued jointly to both of us. You do not want to be burdened with the problems of improper use of my cards.
Brokerage house. Please call my securities broker ________________ at _____________ and instruct him to nullify my standing or special instructions. Follow this with a written confirmation. After the accounts are transferred to your control, you can act as you wish.
Life insurance. My life insurance policies are in my __________________. Our life insurance agent is __________________ and his telephone number is ___________________. He will assist you in obtaining and completing claims forms so that you can promptly begin collecting these benefits.
Personal financial statement. Attached to this letter is an updated personal financial statement that is a bit more detailed in describing the stocks, real estate, partnerships, bank accounts and other investments we have made. When you read this, you will have a good handle on all our investment decisions. I suggest that you consider employing ____________, who I have consulted with from time to time as an investment adviser.
Casualty insurance. The policies that we have on our home, automobiles and other property have been purchased through _________________, whose telephone number is __________________. Be sure that none of the policies are permitted to lapse.
Home. Our home will continue to be owned by you and full title will pass to you outside of the probate court. Our deed and policy of title insurance are held in ________________.
Automobiles. All of our vehicles are registered in both of our names. Registration papers are in _____________________.
Loans. In addition to the loans we have on our real estate, which are represented by notes and deeds of trust, the policies of title insurance and deeds are in _________________. Please give your attention to that account with the advice of our estate-planning adviser. The circumstances will change because everything I own will take on a new tax basis at the time of my death. Accordingly, you have a new set of circumstances to deal with regarding income taxes on any asset sales after my death.
Tax Returns. Copies of our tax returns for the past 10 years are located in _______________. You can also contact our accountant for copies of returns filed in recent years.
Pension Plan. We have a substantial amount in a pension plan. The name and address of the plan administrator is _____________. I have been dealing primarily with __________________ whose telephone number is _______________. If the administrator is not clear about what our benefits are, consult with our estate-planning adviser.
Miscellaneous. Until my estate is settled, you should keep careful records of all checks you receive, as well as what you spend. Turn over all checks made out to me, or in our joint names, to our executor. (Checks made out to you alone may be deposited or cashed by you as always.) You can continue to use our joint bank account if you wish. Keep a record of all bills paid. As questions come up, my executor or estate-planning adviser is available to consult with our family.
Love,
Your Spouse
Wednesday, January 21, 2009
Ten Things to Do to Prepare a Will for Probate
If you are the executor of a will there are many things you must do to get that will ready for probate. Probate means the process by which the deceased’s assets are gathered; outstanding debts, taxes, and expenses of the funeral and the probate process are paid; and the assets are distributed to the beneficiaries in the will. Following here are the top ten things needed to prepare for probate.
Get names and addresses of all person named in the will;
Determine if the deceased has any pending financial or legal matters requiring immediate attention;
Arrange for a meeting with everyone named in the will;
Gather, do not destroy, any of the deceased’s records, tax returns, checks, or other documents;
Get death certificates (from funeral home);
Keep careful records of all funeral-related expenses;
Don’t pay debts unless truly necessary;
Change locks on the door if deceased lived alone;
Secure valuable items;
Notify insurance carriers of the recent death.
Get names and addresses of all person named in the will;
Determine if the deceased has any pending financial or legal matters requiring immediate attention;
Arrange for a meeting with everyone named in the will;
Gather, do not destroy, any of the deceased’s records, tax returns, checks, or other documents;
Get death certificates (from funeral home);
Keep careful records of all funeral-related expenses;
Don’t pay debts unless truly necessary;
Change locks on the door if deceased lived alone;
Secure valuable items;
Notify insurance carriers of the recent death.
Friday, January 16, 2009
Estate Planning When a Spouse is Confronting Health Issues (Estate Planning for the Healthy Spouse)
When one spouse is a resident of a nursing facility or medical institution (the "institutionalized spouse"), but the other spouse continues to live in the community (the "community spouse"), the community spouse may take a number of steps to retain a maximum level of resources without jeopardizing the institutionalized spouse's Medicaid eligibility.1
Medicaid is a joint federal and state program created under Title XIX of the Social Security Act of 1965. It provides a source of funding for long-term care to those aged, blind and disabled individuals who qualify financially. 42 U.S.C. §1396 et seq.; N.J.A.C. 10:71-1 et seq. Eligibility for Medicaid is based upon financial need. For example, under the "Medicaid Only" program, an applicant's countable resources cannot exceed $2,000.00. N.J.A.C. 10:71-4.4.
Following the enactment of the Medicaid program, based upon concern over the widespread practice of purposeful asset divestiture, mostly by the wealthy, to obtain Medicaid eligibility, Congress enacted legislation to impose periods of ineligibility, or "penalty periods," in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself "needy." See Rainey v. Guardianship of Mackey, 773 So. 2d 118, 119 (Fla. Dist. Ct. App. 2000); In re John XX, 652 N.Y.S. 2d 329 (Sup. Ct. 1996), appeal denied, 659 N.Y.S. 2d 854 (1997). This legislation imposes a 36-month "look-back period," in which Medicaid officials will "look back" from the application date to analyze asset transfers by the applicant. Id. If a Medicaid applicant disposes of assets for less than fair market value within the 36-month look-back period, the applicant may be subject to a period of Medicaid ineligibility (a "penalty period"), based upon the value of the uncompensated transfer. 42 U.S.C. §1396(p).
By understanding the Medicaid rules and designing strategies consistent with those rules, the attorney can assist the community spouse in planning his or her estate when the spouse is confronting health issues.
A. Asset Titling — Deeds, Bank Accounts, And Life Insurance
Transfer Of The Institutionalized Spouse's Interest In The Principal Residence to the Community Spouse
The Medicaid transfer penalties do not apply to all uncompensated asset transfers. For example, under current Medicaid law, certain transfers of the Medicaid applicant's principal residence are "exempt" for purposes of determining Medicaid eligibility. One such exempt transfer of the applicant's principal residence for less than fair market value is a transfer to the Medicaid applicant's community spouse. Retitling a couple's jointly held home to the community spouse is a significant estate planning measure for the community spouse.
Among the benefits of transferring the applicant's interest in the home to the community spouse is that the home will escape the imposition of a "Medicaid lien" as mandated by the Medicaid estate recovery program. N.J.S.A. 30:4D-7.2 et seq.; 42 U.S.C. §1396p(b)(1)(B). Under the estate recovery program, the State of New Jersey is entitled to recover payments made on behalf of a Medicaid recipient through the imposition of liens on any real or personal property owned by the Medicaid recipient or in which the Medicaid recipient held legal title at the time of death. Id. New Jersey seeks recovery only from estates of deceased Medicaid recipients.
Thus, by engaging in Medicaid planning and transferring the institutionalized spouse's interest in the home to the community spouse, Medicaid will not penalize the transfer; moreover, Medicaid will be unable to impose a lien on the home because the institutionalized spouse will have no legal title to or legal interest in the home at the time of his or her death.
Other techniques involving the principal residence may assist in maximizing the resources of the community spouse. The community spouse-occupied principal residence is an exempt asset. N.J.A.C. 10:71-4.4. Consequently, prepayment of real estate taxes constitutes a valid spend-down. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.02[C] at 8-7 (Aspen 2003). In addition, because personal effects and household goods are excluded up to a total value of $2,000,2 N.J.A.C. 10:71-4.4, such goods may be purchased as part of a spend-down plan.
In fact, because the community spouse-occupied principal residence is an exempt asset, N.J.A.C. 10:71-4.4, resources may be converted from countable to excludable by selling the residence and purchasing a more expensive home. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.03[C] at 8-9 (Aspen 2003).
Retitling Of Bank Accounts And Life Insurance
If the community spouse has a life insurance policy, a retirement account (e.g., an IRA), or an annuity naming the institutionalized spouse as beneficiary, the beneficiary designation should be changed to a third party (for example, the couple's children). Otherwise, if the beneficiary is designated as the institutionalized spouse, the proceeds would be paid to the institutionalized spouse, who would become ineligible for Medicaid until those funds were expended for his or her nursing care.
Similarly, bank accounts should be retitled so that they are not in the name of the institutionalized spouse.
B. Changing The Will To Exclude The Disabled Spouse
If the community spouse has a Last Will and Testament naming the institutionalized spouse as beneficiary, and the will is not changed to name the children or other third parties as beneficiaries, the estate would be distributed to the institutionalized spouse, who would become ineligible for Medicaid util those funds were expended for his nursing care. For this reason, a revision to the community spouse's will is a necessary element of a Medicaid plan.
Of course, when changing the Last Will and Testament of the community spouse, the attorney must consider the impact that such a change would have on the elective share.
A successful strategy for addressing these two concepts is the execution of a new will in which the community spouse leaves the institutionalized spouse's elective share in a testamentary Special Needs Trust that will not affect his/her eligibility for Medicaid or other needs-based governmental programs.
Under the state elective share statute, N.J.S.A. 3B:8-1, et seq., the surviving spouse has a right to take one-third of the augmented estate of a deceased spouse. Because the statute also provides that half of anything placed in a trust for the surviving spouse counts against the elective share, if the community spouse puts two-thirds of his or her estate in a Special Needs Trust for the surviving spouse, the elective share is satisfied.
The testamentary elective share trust may be designed as a Special Needs Trust so that all distributions of principal are left to the sole discretion of the trustee and may be made only for products and services which supplement governmental benefits received by the disabled spouse.
The amount of the estate above the elective share may be left outright to the children or other heirs.
C. Durable Power Of Attorney With Gift-Giving Power
A financial power of attorney is a legal instrument by which an individual (the "principal") authorizes another person(s) (the "attorney(s)-in-fact" or "agent(s)") to perform specific acts enumerated in the instrument on behalf of the principal See N.J.S.A. 46:2B-8.2; 2A C.J.S. Agency § 44; Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[1] at 13-5 (Matthew Bender 1999). An agent under a power of attorney is specifically authorized by New Jersey statute to conduct banking transactions on behalf of a principal. N.J.S.A. 46:2B-11.
Care must be taken by the attorney in the structuring and execution of a power of attorney instrument. In order to execute a power of attorney, the principal must possess the capacity to contract, or to understand the nature and the effect of the act of appointing an agent. See Mazart, G., New Jersey Elder Law Practice, §2 at 2-3 (New Jersey Institute for Continuing Legal Education 1999).
Because an ordinary power of attorney is only effective during the time that the principal is competent, it is void when the principal becomes incapacitated, rendering it ineffective as a tool for addressing disability. Consequently, New Jersey statutory law authorizes the use of a "durable" power of attorney, in which the instrument is not affected by the disability of the principal. N.J.S.A. 46:2B-8.2. A power of attorney is "durable" if it states: "This power of attorney shall not be affected by subsequent disability or incapacity of the principal;" or "This power of attorney shall become effective upon the disability or incapacity of the principal;" or similar words. Id.
When a power of attorney is durable, all action taken by the agent pursuant to that power during the principal's disability or incompetence has the same effect, and binds the principal as if the principal were competent. N.J.S.A. 46:2B-8.3. Thus, the durable power of attorney provides the principal with the opportunity to select his or her own agent to act in the event of incapacity, which is a favorable alternative to, and may avoid, resorting to the courts for such appointment in a guardianship or conservatorship proceeding. See J. Regan, R. Morgan and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[2] at 13-6 (Matthew Bender 1999).
Critical for purposes of Medicaid planning is the fact that a power of attorney cannot be construed as authorizing the attorney-in-fact to "gratuitously transfer property of the principal to the attorney-in-fact or to others except to the extent that the power of attorney expressly and specifically so authorizes." N.J.S.A. 46:2B-8.13a. Consequently, if the power of attorney is to be used to conduct Medicaid planning including gifting strategies on behalf of the institutionalized spouse, it must specifically include gifting powers.
While blanket gifting provisions, giving authorization generally to make gifts of the principal's property, allow the agent authority to conduct Medicaid planning, blanket gifting powers may also create problems. For example, such a provision could be used by an agent/child to make gifts favoring himself over the principal's other children. While such conduct could be considered contrary to the agent's fiduciary duty to avoid self-dealing, the blanket gifting provision could also be deemed to be a waiver of the agent's fiduciary duty to avoid self-dealing.
For these reasons, as well as the fact that blanket gifting provisions may trigger tax traps, it may be prudent to tailor gifting provisions (for example, to permit gifting, including to the agent, as long as the agent and siblings are treated equally; or to permit gifting to the agent only when prior approval for the transfer is given by the alternate agent).
D. Other Techniques
Divorce
Divorce from an institutionalized spouse may be troublesome concept, from a personal standpoint. In fact, a divorce consummated in the context of Medicaid planning is considered to be one of the more "extreme Medicaid planning strategies." H. Fliegelman and D. Fliegelman, Giving Guardians The Power To Do Medicaid Planning, 32 Wake Forest L. Rev. 341, 364 (Summer 1997). Nevertheless, it may be a prudent financial strategy for a community spouse.
If the court grants an equitable distribution to a community spouse, or recognizes a Qualified Domestic Relations Order ("QDRO") incident to a divorce, the resulting distribution to the community spouse may greatly exceed the Community Spouse Resource Allowance available to the community spouse absent a divorce.
The New Jersey Supreme Court was presented with a property settlement agreement entered into between the guardian/child of an incapacitated nursing home resident and the community spouse seeking to divorce him in In re L.M., 140 N.J. 480 (1995). There, the settlement agreement provided for the transfer of the ward's pension interest to the spouse. The Supreme Court recognized the agreement as, in whole or in part, an attempt at Medicaid planning. Id. at 489. Nevertheless, it held that the transfer, which was incorporated into a Qualified Domestic Relations Order ("QDRO"), successfully shielded the pension from Medicaid consideration. Id.
The Community Spouse Resource Allowance ("CSRA")
The Community Spouse Resource Allowance ("CSRA") is the amount of non-exempt resources (owned jointly or separately by either spouse) that the law permits the community spouse to retain without jeopardizing the Medicaid eligibility of the institutionalized spouse. Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[3] at 10-63 (Matthew Bender 1999).
In 2004, the community spouse is permitted to retain a maximum of $92,760 and a minimum of $18,552. The CSRA is computed as of the first day that the institutionalized spouse begins a 30-day or more period of institutionalization. Id. As of the date of computation, the community spouse is permitted to retain $18,552 (as of January 1, 2004) or half of the couple's resources, up to a maximum of $92,760 (as of January 1, 2004). If that amount is more than the actual resources in the community spouse's sole name, the difference will be recouped by a transfer from the institutionalized spouse.
In order to maximize the community spouse's resource allowance, a sound Medicaid plan will aim to transfer the couple's countable assets, with the exception of an amount equal to twice the CSRA ($185,520 in 2004). Then, after the spouse is institutionalized and the CSRA is calculated (ideally at $92,760), the remaining $92,760 will be spent down on nursing home care and other medical costs and preserved using various planning techniques.
Because the CSRA is calculated based upon assets but not liabilities, if the couple's resources are less than twice the CSRA maximum, one technique aimed at maximizing the community spouse's CSRA involves the spouse obtaining a loan from his or her children in the amount of the couple's resources. After the CSRA is calculated, the loan can be immediately repaid from the institutionalized spouse's resources, i.e., the spend-down requirement. See id.
The Minimum Monthly Maintenance Needs Allowance ("MMMNA")
When a spouse is institutionalized, the Medicaid rules permit the community spouse to keep her own separate income titled in her sole name, plus one-half of the income in the couple's joint names. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003); Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[2] at 10-58 (Matthew Bender 1999). If that amount does not equal the minimum monthly maintenance needs allowance ("MMNA"), calculated at $1,515 until July 1, 2004, the community spouse may seek the shortfall from the income of the institutionalized spouse, pursuant to the "income first rule". Id.
If the income of the institutionalized spouse is insufficient to meet the shortfall, then the community spouse may seek to receive that amount of resources above the CSRA calculated to generate income necessary to meet the shortfall.
The Excess Shelter Allowance
The community spouse also has the right to an excess shelter allowance. Shelter expenses are defined as "rent or mortgage (including principal and interest), taxes and insurance, a utility standard for the individual's utility expenses, and in the case of a condominium or cooperative, the monthly required maintenance charge." N.J.A.C. 10:71-5.7(c)(1). If the cost of the community spouse's monthly shelter exceeds a specified amount ($454.50 through July 1, 2004), he or she is entitled to payment of that difference from the income of the institutionalized spouse.
The community spouse's total excess shelter allowance and MMNA cannot exceed a certain amount ($2,266.50 in 2003), except by resort to a fair hearing. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003). By Donald D. Vanarelli, Esq.
Medicaid is a joint federal and state program created under Title XIX of the Social Security Act of 1965. It provides a source of funding for long-term care to those aged, blind and disabled individuals who qualify financially. 42 U.S.C. §1396 et seq.; N.J.A.C. 10:71-1 et seq. Eligibility for Medicaid is based upon financial need. For example, under the "Medicaid Only" program, an applicant's countable resources cannot exceed $2,000.00. N.J.A.C. 10:71-4.4.
Following the enactment of the Medicaid program, based upon concern over the widespread practice of purposeful asset divestiture, mostly by the wealthy, to obtain Medicaid eligibility, Congress enacted legislation to impose periods of ineligibility, or "penalty periods," in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself "needy." See Rainey v. Guardianship of Mackey, 773 So. 2d 118, 119 (Fla. Dist. Ct. App. 2000); In re John XX, 652 N.Y.S. 2d 329 (Sup. Ct. 1996), appeal denied, 659 N.Y.S. 2d 854 (1997). This legislation imposes a 36-month "look-back period," in which Medicaid officials will "look back" from the application date to analyze asset transfers by the applicant. Id. If a Medicaid applicant disposes of assets for less than fair market value within the 36-month look-back period, the applicant may be subject to a period of Medicaid ineligibility (a "penalty period"), based upon the value of the uncompensated transfer. 42 U.S.C. §1396(p).
By understanding the Medicaid rules and designing strategies consistent with those rules, the attorney can assist the community spouse in planning his or her estate when the spouse is confronting health issues.
A. Asset Titling — Deeds, Bank Accounts, And Life Insurance
Transfer Of The Institutionalized Spouse's Interest In The Principal Residence to the Community Spouse
The Medicaid transfer penalties do not apply to all uncompensated asset transfers. For example, under current Medicaid law, certain transfers of the Medicaid applicant's principal residence are "exempt" for purposes of determining Medicaid eligibility. One such exempt transfer of the applicant's principal residence for less than fair market value is a transfer to the Medicaid applicant's community spouse. Retitling a couple's jointly held home to the community spouse is a significant estate planning measure for the community spouse.
Among the benefits of transferring the applicant's interest in the home to the community spouse is that the home will escape the imposition of a "Medicaid lien" as mandated by the Medicaid estate recovery program. N.J.S.A. 30:4D-7.2 et seq.; 42 U.S.C. §1396p(b)(1)(B). Under the estate recovery program, the State of New Jersey is entitled to recover payments made on behalf of a Medicaid recipient through the imposition of liens on any real or personal property owned by the Medicaid recipient or in which the Medicaid recipient held legal title at the time of death. Id. New Jersey seeks recovery only from estates of deceased Medicaid recipients.
Thus, by engaging in Medicaid planning and transferring the institutionalized spouse's interest in the home to the community spouse, Medicaid will not penalize the transfer; moreover, Medicaid will be unable to impose a lien on the home because the institutionalized spouse will have no legal title to or legal interest in the home at the time of his or her death.
Other techniques involving the principal residence may assist in maximizing the resources of the community spouse. The community spouse-occupied principal residence is an exempt asset. N.J.A.C. 10:71-4.4. Consequently, prepayment of real estate taxes constitutes a valid spend-down. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.02[C] at 8-7 (Aspen 2003). In addition, because personal effects and household goods are excluded up to a total value of $2,000,2 N.J.A.C. 10:71-4.4, such goods may be purchased as part of a spend-down plan.
In fact, because the community spouse-occupied principal residence is an exempt asset, N.J.A.C. 10:71-4.4, resources may be converted from countable to excludable by selling the residence and purchasing a more expensive home. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.03[C] at 8-9 (Aspen 2003).
Retitling Of Bank Accounts And Life Insurance
If the community spouse has a life insurance policy, a retirement account (e.g., an IRA), or an annuity naming the institutionalized spouse as beneficiary, the beneficiary designation should be changed to a third party (for example, the couple's children). Otherwise, if the beneficiary is designated as the institutionalized spouse, the proceeds would be paid to the institutionalized spouse, who would become ineligible for Medicaid until those funds were expended for his or her nursing care.
Similarly, bank accounts should be retitled so that they are not in the name of the institutionalized spouse.
B. Changing The Will To Exclude The Disabled Spouse
If the community spouse has a Last Will and Testament naming the institutionalized spouse as beneficiary, and the will is not changed to name the children or other third parties as beneficiaries, the estate would be distributed to the institutionalized spouse, who would become ineligible for Medicaid util those funds were expended for his nursing care. For this reason, a revision to the community spouse's will is a necessary element of a Medicaid plan.
Of course, when changing the Last Will and Testament of the community spouse, the attorney must consider the impact that such a change would have on the elective share.
A successful strategy for addressing these two concepts is the execution of a new will in which the community spouse leaves the institutionalized spouse's elective share in a testamentary Special Needs Trust that will not affect his/her eligibility for Medicaid or other needs-based governmental programs.
Under the state elective share statute, N.J.S.A. 3B:8-1, et seq., the surviving spouse has a right to take one-third of the augmented estate of a deceased spouse. Because the statute also provides that half of anything placed in a trust for the surviving spouse counts against the elective share, if the community spouse puts two-thirds of his or her estate in a Special Needs Trust for the surviving spouse, the elective share is satisfied.
The testamentary elective share trust may be designed as a Special Needs Trust so that all distributions of principal are left to the sole discretion of the trustee and may be made only for products and services which supplement governmental benefits received by the disabled spouse.
The amount of the estate above the elective share may be left outright to the children or other heirs.
C. Durable Power Of Attorney With Gift-Giving Power
A financial power of attorney is a legal instrument by which an individual (the "principal") authorizes another person(s) (the "attorney(s)-in-fact" or "agent(s)") to perform specific acts enumerated in the instrument on behalf of the principal See N.J.S.A. 46:2B-8.2; 2A C.J.S. Agency § 44; Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[1] at 13-5 (Matthew Bender 1999). An agent under a power of attorney is specifically authorized by New Jersey statute to conduct banking transactions on behalf of a principal. N.J.S.A. 46:2B-11.
Care must be taken by the attorney in the structuring and execution of a power of attorney instrument. In order to execute a power of attorney, the principal must possess the capacity to contract, or to understand the nature and the effect of the act of appointing an agent. See Mazart, G., New Jersey Elder Law Practice, §2 at 2-3 (New Jersey Institute for Continuing Legal Education 1999).
Because an ordinary power of attorney is only effective during the time that the principal is competent, it is void when the principal becomes incapacitated, rendering it ineffective as a tool for addressing disability. Consequently, New Jersey statutory law authorizes the use of a "durable" power of attorney, in which the instrument is not affected by the disability of the principal. N.J.S.A. 46:2B-8.2. A power of attorney is "durable" if it states: "This power of attorney shall not be affected by subsequent disability or incapacity of the principal;" or "This power of attorney shall become effective upon the disability or incapacity of the principal;" or similar words. Id.
When a power of attorney is durable, all action taken by the agent pursuant to that power during the principal's disability or incompetence has the same effect, and binds the principal as if the principal were competent. N.J.S.A. 46:2B-8.3. Thus, the durable power of attorney provides the principal with the opportunity to select his or her own agent to act in the event of incapacity, which is a favorable alternative to, and may avoid, resorting to the courts for such appointment in a guardianship or conservatorship proceeding. See J. Regan, R. Morgan and English, D., Tax, Estate & Financial Planning For The Elderly, §13.03[2] at 13-6 (Matthew Bender 1999).
Critical for purposes of Medicaid planning is the fact that a power of attorney cannot be construed as authorizing the attorney-in-fact to "gratuitously transfer property of the principal to the attorney-in-fact or to others except to the extent that the power of attorney expressly and specifically so authorizes." N.J.S.A. 46:2B-8.13a. Consequently, if the power of attorney is to be used to conduct Medicaid planning including gifting strategies on behalf of the institutionalized spouse, it must specifically include gifting powers.
While blanket gifting provisions, giving authorization generally to make gifts of the principal's property, allow the agent authority to conduct Medicaid planning, blanket gifting powers may also create problems. For example, such a provision could be used by an agent/child to make gifts favoring himself over the principal's other children. While such conduct could be considered contrary to the agent's fiduciary duty to avoid self-dealing, the blanket gifting provision could also be deemed to be a waiver of the agent's fiduciary duty to avoid self-dealing.
For these reasons, as well as the fact that blanket gifting provisions may trigger tax traps, it may be prudent to tailor gifting provisions (for example, to permit gifting, including to the agent, as long as the agent and siblings are treated equally; or to permit gifting to the agent only when prior approval for the transfer is given by the alternate agent).
D. Other Techniques
Divorce
Divorce from an institutionalized spouse may be troublesome concept, from a personal standpoint. In fact, a divorce consummated in the context of Medicaid planning is considered to be one of the more "extreme Medicaid planning strategies." H. Fliegelman and D. Fliegelman, Giving Guardians The Power To Do Medicaid Planning, 32 Wake Forest L. Rev. 341, 364 (Summer 1997). Nevertheless, it may be a prudent financial strategy for a community spouse.
If the court grants an equitable distribution to a community spouse, or recognizes a Qualified Domestic Relations Order ("QDRO") incident to a divorce, the resulting distribution to the community spouse may greatly exceed the Community Spouse Resource Allowance available to the community spouse absent a divorce.
The New Jersey Supreme Court was presented with a property settlement agreement entered into between the guardian/child of an incapacitated nursing home resident and the community spouse seeking to divorce him in In re L.M., 140 N.J. 480 (1995). There, the settlement agreement provided for the transfer of the ward's pension interest to the spouse. The Supreme Court recognized the agreement as, in whole or in part, an attempt at Medicaid planning. Id. at 489. Nevertheless, it held that the transfer, which was incorporated into a Qualified Domestic Relations Order ("QDRO"), successfully shielded the pension from Medicaid consideration. Id.
The Community Spouse Resource Allowance ("CSRA")
The Community Spouse Resource Allowance ("CSRA") is the amount of non-exempt resources (owned jointly or separately by either spouse) that the law permits the community spouse to retain without jeopardizing the Medicaid eligibility of the institutionalized spouse. Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[3] at 10-63 (Matthew Bender 1999).
In 2004, the community spouse is permitted to retain a maximum of $92,760 and a minimum of $18,552. The CSRA is computed as of the first day that the institutionalized spouse begins a 30-day or more period of institutionalization. Id. As of the date of computation, the community spouse is permitted to retain $18,552 (as of January 1, 2004) or half of the couple's resources, up to a maximum of $92,760 (as of January 1, 2004). If that amount is more than the actual resources in the community spouse's sole name, the difference will be recouped by a transfer from the institutionalized spouse.
In order to maximize the community spouse's resource allowance, a sound Medicaid plan will aim to transfer the couple's countable assets, with the exception of an amount equal to twice the CSRA ($185,520 in 2004). Then, after the spouse is institutionalized and the CSRA is calculated (ideally at $92,760), the remaining $92,760 will be spent down on nursing home care and other medical costs and preserved using various planning techniques.
Because the CSRA is calculated based upon assets but not liabilities, if the couple's resources are less than twice the CSRA maximum, one technique aimed at maximizing the community spouse's CSRA involves the spouse obtaining a loan from his or her children in the amount of the couple's resources. After the CSRA is calculated, the loan can be immediately repaid from the institutionalized spouse's resources, i.e., the spend-down requirement. See id.
The Minimum Monthly Maintenance Needs Allowance ("MMMNA")
When a spouse is institutionalized, the Medicaid rules permit the community spouse to keep her own separate income titled in her sole name, plus one-half of the income in the couple's joint names. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003); Regan, J., Morgan, R. and English, D., Tax, Estate & Financial Planning For The Elderly, §10.11[2] at 10-58 (Matthew Bender 1999). If that amount does not equal the minimum monthly maintenance needs allowance ("MMNA"), calculated at $1,515 until July 1, 2004, the community spouse may seek the shortfall from the income of the institutionalized spouse, pursuant to the "income first rule". Id.
If the income of the institutionalized spouse is insufficient to meet the shortfall, then the community spouse may seek to receive that amount of resources above the CSRA calculated to generate income necessary to meet the shortfall.
The Excess Shelter Allowance
The community spouse also has the right to an excess shelter allowance. Shelter expenses are defined as "rent or mortgage (including principal and interest), taxes and insurance, a utility standard for the individual's utility expenses, and in the case of a condominium or cooperative, the monthly required maintenance charge." N.J.A.C. 10:71-5.7(c)(1). If the cost of the community spouse's monthly shelter exceeds a specified amount ($454.50 through July 1, 2004), he or she is entitled to payment of that difference from the income of the institutionalized spouse.
The community spouse's total excess shelter allowance and MMNA cannot exceed a certain amount ($2,266.50 in 2003), except by resort to a fair hearing. Begley, T. and Jeffreys, J., Representing the Elderly Client: Law and Practice, §8.06[A][1] at 8-50 to 8-51 (Aspen 2003). By Donald D. Vanarelli, Esq.
Thursday, January 1, 2009
HOW IS MY NJ ESTATE DISTRIBUTED WITHOUT A WILL IN NJ?
New Jersey law provides how your Estate will be distributed if you do die without a Will. The property referred to in this section deals with assets in the decedent's name alone.
A)If you die leaving a spouse or domestic partner and children of the same marriage, the spouse or domestic partner will inherit the entire estate. (i.e., no stepchildren or children of a prior union)
B)If you die leaving a spouse or domestic partner and children of a prior union, the spouse or domestic partner will inherit the first 25% of the estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of any balance of the estate. Your children take the balance equally. Grandchildren will take a portion of their deceased parent's share
C)If you die leaving a spouse or domestic partner, child or children a stepchild or stepchildren, the spouse or domestic partner will inherit the first 25% of the estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of any balance of the estate. Your children take the balance of the estate equally. Grandchildren will take a portion of their deceased parent's share.
D)If you die leaving a spouse or domestic partner and no children, but are survived by parents, the spouse or domestic partner will inherit the first 25% of the estate, but not less than $50,000.00 nor more than $200,000.00 plus three-fourths of any balance of the estate. Your parents take the balance equally.
E)If you die leaving a child or children but no spouse or domestic partner, children will inherit equally. Grandchildren will take a portion of their deceased parent's share.
F) If you die leaving no spouse or domestic partner, children or grandchildren, your parents take all. If no parent survives, your brothers and sisters will take equally.
G)Where there is no immediate family, your property may go to more distant relatives (grandparents, aunts, uncles, cousins, etc.), then to stepchildren, or even revert to the State.
A)If you die leaving a spouse or domestic partner and children of the same marriage, the spouse or domestic partner will inherit the entire estate. (i.e., no stepchildren or children of a prior union)
B)If you die leaving a spouse or domestic partner and children of a prior union, the spouse or domestic partner will inherit the first 25% of the estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of any balance of the estate. Your children take the balance equally. Grandchildren will take a portion of their deceased parent's share
C)If you die leaving a spouse or domestic partner, child or children a stepchild or stepchildren, the spouse or domestic partner will inherit the first 25% of the estate, but not less than $50,000.00 nor more than $200,000.00, plus one-half of any balance of the estate. Your children take the balance of the estate equally. Grandchildren will take a portion of their deceased parent's share.
D)If you die leaving a spouse or domestic partner and no children, but are survived by parents, the spouse or domestic partner will inherit the first 25% of the estate, but not less than $50,000.00 nor more than $200,000.00 plus three-fourths of any balance of the estate. Your parents take the balance equally.
E)If you die leaving a child or children but no spouse or domestic partner, children will inherit equally. Grandchildren will take a portion of their deceased parent's share.
F) If you die leaving no spouse or domestic partner, children or grandchildren, your parents take all. If no parent survives, your brothers and sisters will take equally.
G)Where there is no immediate family, your property may go to more distant relatives (grandparents, aunts, uncles, cousins, etc.), then to stepchildren, or even revert to the State.
Saturday, December 27, 2008
Estate Planning and Life Insurance Trusts
By Parag P. Patel, Esq.
Few people realize that, even though they may have a modest estate, their families may owe the government hundreds of thousands of dollars because they own a life insurance policy with a substantial death benefit. This is because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax at rates from 37% to 55%.
The solution to this problem is to create an irrevocable life insurance trust to own the policy and receive the policy proceeds on your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries from their own "excesses," against their creditors and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here's how the irrevocable life insurance trust works.
You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. The contributions you make to the trust for premium payments generally will qualify for the annual gift tax exclusion. The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee's discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial interests in the trust, such as entitlement to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.
If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you.
My experience indicates that for most clients this is an issue. If you have an estate plan, review your documents to ensure proper estate tax planning is in place. If you have no estate plan, you should talk to an estate planning attorney to minimize your estate tax bill and maximize your estate assets for your family.
Few people realize that, even though they may have a modest estate, their families may owe the government hundreds of thousands of dollars because they own a life insurance policy with a substantial death benefit. This is because life insurance proceeds, while not subject to federal income tax, are considered part of your taxable estate and are subject to federal estate tax at rates from 37% to 55%.
The solution to this problem is to create an irrevocable life insurance trust to own the policy and receive the policy proceeds on your death. A properly drafted life insurance trust keeps the insurance proceeds from being taxed in your estate as well as in the estate of your surviving spouse. It also protects the trust beneficiaries from their own "excesses," against their creditors and in the event of divorce. Moreover, the trust also provides reliable management for the trust assets. Here's how the irrevocable life insurance trust works.
You create an irrevocable life insurance trust to be the owner and beneficiary of one or more life insurance policies on your life. You contribute cash to the trust to be used by the trustee to make premium payments on the life insurance policies. The contributions you make to the trust for premium payments generally will qualify for the annual gift tax exclusion. The life insurance trust typically provides that, during your lifetime, principal and income, in the trustee's discretion, may be paid or applied to or for the benefit of your spouse and descendants. This allows indirect access to the cash surrender value of the life insurance policies owned by the trust, and permits the trust to be terminated if desired despite its being irrevocable. On your death, the trust continues for the benefit of your spouse during his or her lifetime. Your spouse is given certain beneficial interests in the trust, such as entitlement to income, limited invasion rights, and eligibility to receive principal. On the death of your spouse, the trust assets are paid outright to, or held in further trust for the benefit of, your descendants.
If you own a life insurance policy with a significant death benefit, an irrevocable life insurance trust may be of substantial benefit to you.
My experience indicates that for most clients this is an issue. If you have an estate plan, review your documents to ensure proper estate tax planning is in place. If you have no estate plan, you should talk to an estate planning attorney to minimize your estate tax bill and maximize your estate assets for your family.
Wednesday, December 10, 2008
How to Stretch Your IRA Into a Family Fortune
Your individual retirement account (IRA) can do much more than provide funds for your retirement -- it can be stretched to provide millions of dollars in payouts to your children, grandchildren or others you choose to be beneficiaries.
Example: An IRA balance of only $100,000 may provide more than $8 million in future distributions when left to a young child.
What you need to know...
stretching an IRA
Most IRA owners think of their IRAs as providing savings only for themselves -- and their spouses, if married.
This is largely because traditional IRAs are subject to annual required minimum distributions (RMDs) that begin at age 70½ and cause the IRA's funds to be distributed over the life expectancy of its owner.
IRA owners typically believe that if they live to their full life expectancies (or longer), there will be little or nothing left in their IRAs to leave to heirs.
Surprise: The life expectancies that govern mandatory IRA distributions as given in IRS tables are not actual life expectancies. The IRS life expectancies are much longer than actual average life expectancies.
The table below shows the life expectancies as provided by the IRS's "Uniform Lifetime Table" for IRA distributions, which is used by most IRA owners (single persons and married persons with spouses not more than 10 years younger) to determine the size of RMDs, versus actual average life expectancies as given by the National Center for Health Statistics.
Life Expectancies
Age | IRA Table Years | Actual Years |
70 | 27.4 | 14.9 |
75 | 22.9 | 11.8 |
80 | 18.7 | 9.0 |
85 | 14.8 | 6.8 |
90 | 11.4 | 5.0 |
95 | 8.6 | 3.6 |
100 | 6.3 | 2.6 |
Key: As a result of the difference, you may be able to leave funds in an IRA for much longer than you expect.
Moreover, initial RMDs may be so small that your IRA will continue to grow in value for years after distributions begin.
Explanation: At age 70½, when RMDs start, life expectancy under the IRS table is 27.4 years.
Each year's RMD is determined by dividing the IRA balance by the number of years in life expectancy -- so at age 70½, the RMD is 1/27.4, or 3.6%, of the IRA's value. If your IRA earns more than this, it will continue to grow in value in spite of the distributions.
So, if you take only minimum distributions each year from your IRA and it earns 8% annually, it will continue to grow until you reach age 88! (Under the IRS table, the RMD won't reach 8% of the IRA's value until then.)
the stretch
Once a beneficiary receives an IRA, its value may resume growing at a much faster rate.
Rule: A beneficiary can take required distributions over his/her life expectancy starting in the year after the inheritance. But if the beneficiary is young, life expectancy may be 50, 60 or 70 years, or even more, making initial RMDs so small that the IRA can grow rapidly.
Example: A grandparent leaves a $100,000 balance in an IRA that earns 8% annually to a one-year-old grandchild. The child's life expectancy under the IRS single life tables used by beneficiaries is 81.6 years, so the initial RMD is only 1.2% of the IRA balance.
Under the applicable IRS life expectancy table, the RMD won't reach 8% of the IRA balance until the grandchild is 70 years old. If the child takes minimum distributions, the IRA balance will grow for 69 years -- even with the child taking minimum distributions from it all that time.
In total, over the 82 years of the child's life expectancy, the IRA will pay the child $8,167,629 dollars -- more than eight million dollars from the initial $100,000.
how to do it
Steps to make the most of your IRAs...
Roll over funds from other retirement accounts into IRAs. This will let you use the "stretch IRA" strategy for as much of your retirement savings as possible.
Open Roth IRAs or convert traditional IRAs to Roths if eligible. These are even better to stretch than traditional IRAs. Distributions from them are tax free and there are no required minimum distributions for the original IRA owner. (Beneficiaries must take RMDs.) This lets you save funds in them for longer periods to earn more compounding.
Plan retirement spending to preserve IRAs. Build your investment portfolio for your retirement years. Best: Plan to consume IRA funds last. This will provide more tax-favored compounding within the IRA for you, and help you leave a bigger IRA balance to heirs.
Rules for the stretch
The beneficiary who takes a stretch IRA must be a named person, not your estate.
Be sure the custodial agreement with your IRA trustee provides for allowing a stretch IRA -- not all do.
Either have separate IRAs for each beneficiary or formally "split" your IRA among them, such as by designating a set percentage as going to each. Traps...
If an IRA with multiple beneficiaries isn't split up, the life expectancy of the oldest governs distributions for the others.
If a non-person (such as a charity) is co-beneficiary of an IRA, its life span of zero applies to all other co-beneficiaries, forcing them to take rapid distributions -- and eliminating the stretch.
When an IRA is left to a spouse, to use its funds to set up a stretch IRA for a child (or other beneficiary), the spouse must first convert the inherited IRA into his own IRA (only a spouse can do this), and then name the child (or other party) as beneficiary.
After the spouse dies, the inherited IRA must be retitled with the deceased owner's name in it, or the IRS will deem it distributed and taxable.
Example: "Frederic Jackson, IRA (deceased June 15, 2006) for the benefit of Sandra Jackson, beneficiary."
Important: Convince your beneficiaries of the importance of taking minimum "stretch" distributions. If they empty your IRA of cash as soon as they inherit it, all the potential decades of future compounding will be lost.
Saver: A trust can be named as beneficiary of your IRA to pass through payments to an heir, assuring that only minimum RMDs are taken (unless the trustee deems there is good reason to take larger distributions) so compounding is maximized.
Many technical rules apply to trusts and IRAs generally, so consult an IRA expert.
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