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.
Wednesday, January 21, 2009
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.
Friday, December 5, 2008
Stretch your IRA
How would you like to make your grandchildren millionaires? Would it put a smile on your face to insure that your great-grandchildren never have to think about money?
Its easy ... if you have the discipline and self control to budget annual savings, if you're right about any number of assumptions and if you read on.
We're talking about Stretch IRAs.
Individual Retirement Accounts (IRAs) have been one of the most popular retirement vehicles for the past generation of investors. They let you enjoy tax-deferred savings over an extended period of time.
A Stretch IRA is a term commonly used to describe an IRA established to extend the period of tax-deferred earnings, typically over multiple generations.
In the short run, you can use the concept to reduce the required withdrawal you must take from the account if you're retired or at least age 70 1/2, and you'll cut your current income tax bill as well.
Meanwhile, because you are extending the IRA payout until your grandchildren retire (or further, if appropriate), you get substantial additional deferral years to compound the earnings growth. Depending on the earnings and payout rates, potential payouts may approach multi-million-dollar levels.
Distribution rules simplified
All of this becomes possible thanks to rules a few years ago that simplified distribution rules for qualified plans and IRAs. These rules:
Provide a uniform table to determine lifetime required minimum distributions regardless of age.
Permit a beneficiary to be determined up to the end of the year following the death of the primary owner.
Allow the normal life expectancy that would apply at the time of death to be taken into account in the calculation of post-death minimum distributions.
The rules let you determine your minimum distribution each year, based on your current age and account balance. The new distribution schedule is based on the joint life expectancies of you and a survivor who's at least 10 years younger. It assumes that both begin receiving distributions beginning at age 70. (There's an even simpler distribution table for spouses who are not more than 10 years apart in age.)
These new rules also allow you to determine your beneficiary up to your death, and to select a beneficiary more than 10 years younger than you. These moves are what combine to reduce current minimum distribution requirements and extend the deferral period. (Remember, you can always take more than the minimum required annual distribution from your retirement plan. These changes affect people who want to take out the lowest required amount.)
Checking out the numbers
Lets take an example. Assume I started my IRA at age 29. (I know, I know: I should have started earlier.) And I plan to contribute $2,000 per year until age 69 when I die. That gives me 40 years of compounding, and, at a 7% rate of return, my IRA at the end of that time should be worth $399,270.
I leave the IRA to my wife, whos 20 years younger than I am and who lives until shes 69. Thats another 20 years of tax-deferred compounding, which, at 7%, compounded monthly, brings the value of the account to $1,612,547.
She leaves the account to our granddaughter, who has additional 70 years of compounding. At the same 7% rate, her account is then worth $213,487,584 when she retires!
I can see the smile on her face now ... even if the money becomes all taxable. I can hear her children laughing, freed from any financial concerns.
(The numbers potentially could be bigger. Thanks to the 2001 and 2003 tax cut laws, you have been able to make larger contributions to IRAs. For 2005 and 2006, the contribution limit is $4,000 a year. It will rise to $5,000 a year starting in 2008.)
IRAs have been an excellent and extremely popular investment tool. As of 2004, millions of Americans have saved $3.07 trillion for retirement using IRAs and employer-sponsored defined contribution plans, according to the Investment Company Institute. The IRA total was $1.49 trillion.
Is the Stretch IRA right for you?
But before you jump at Stretch IRAs, recognize that its all in the assumptions. Any changes in the assumptions change the potential value of your investment fund. A Stretch IRA assumes:
You dont need the money, either before or after retirement. That's a big assumption.
You will take the smallest amount of money the law allows, and at the latest time it allows, without penalty (currently at age 70 1/2).
Your primary beneficiaries die early, before they can deplete the investment fund.
That tax laws will remain constant and not change.
That inflation is minimal, and will not significantly cut into your rate of return and the ending values of the account.
That your returns dont vary. Most Stretch IRAs assume a constant rate of return that can be projected accurately over the long term. In the real world, those investors in the stock market who got in six years ago and got out two years ago -- before the market crash -- will have a very different rate of return than those who started their investment portfolio two years ago.
Stretch IRAs are a great way to accumulate financial freedom for your heirs. But their true value depends on realistic assumptions being made and realized. Lots of things can happen that will stunt the growth of an IRA. And you have to be sure the account fits YOUR needs.
But that $213 million looks awfully attractive to me!
Its easy ... if you have the discipline and self control to budget annual savings, if you're right about any number of assumptions and if you read on.
We're talking about Stretch IRAs.
Individual Retirement Accounts (IRAs) have been one of the most popular retirement vehicles for the past generation of investors. They let you enjoy tax-deferred savings over an extended period of time.
A Stretch IRA is a term commonly used to describe an IRA established to extend the period of tax-deferred earnings, typically over multiple generations.
In the short run, you can use the concept to reduce the required withdrawal you must take from the account if you're retired or at least age 70 1/2, and you'll cut your current income tax bill as well.
Meanwhile, because you are extending the IRA payout until your grandchildren retire (or further, if appropriate), you get substantial additional deferral years to compound the earnings growth. Depending on the earnings and payout rates, potential payouts may approach multi-million-dollar levels.
Distribution rules simplified
All of this becomes possible thanks to rules a few years ago that simplified distribution rules for qualified plans and IRAs. These rules:
Provide a uniform table to determine lifetime required minimum distributions regardless of age.
Permit a beneficiary to be determined up to the end of the year following the death of the primary owner.
Allow the normal life expectancy that would apply at the time of death to be taken into account in the calculation of post-death minimum distributions.
The rules let you determine your minimum distribution each year, based on your current age and account balance. The new distribution schedule is based on the joint life expectancies of you and a survivor who's at least 10 years younger. It assumes that both begin receiving distributions beginning at age 70. (There's an even simpler distribution table for spouses who are not more than 10 years apart in age.)
These new rules also allow you to determine your beneficiary up to your death, and to select a beneficiary more than 10 years younger than you. These moves are what combine to reduce current minimum distribution requirements and extend the deferral period. (Remember, you can always take more than the minimum required annual distribution from your retirement plan. These changes affect people who want to take out the lowest required amount.)
Checking out the numbers
Lets take an example. Assume I started my IRA at age 29. (I know, I know: I should have started earlier.) And I plan to contribute $2,000 per year until age 69 when I die. That gives me 40 years of compounding, and, at a 7% rate of return, my IRA at the end of that time should be worth $399,270.
I leave the IRA to my wife, whos 20 years younger than I am and who lives until shes 69. Thats another 20 years of tax-deferred compounding, which, at 7%, compounded monthly, brings the value of the account to $1,612,547.
She leaves the account to our granddaughter, who has additional 70 years of compounding. At the same 7% rate, her account is then worth $213,487,584 when she retires!
I can see the smile on her face now ... even if the money becomes all taxable. I can hear her children laughing, freed from any financial concerns.
(The numbers potentially could be bigger. Thanks to the 2001 and 2003 tax cut laws, you have been able to make larger contributions to IRAs. For 2005 and 2006, the contribution limit is $4,000 a year. It will rise to $5,000 a year starting in 2008.)
IRAs have been an excellent and extremely popular investment tool. As of 2004, millions of Americans have saved $3.07 trillion for retirement using IRAs and employer-sponsored defined contribution plans, according to the Investment Company Institute. The IRA total was $1.49 trillion.
Is the Stretch IRA right for you?
But before you jump at Stretch IRAs, recognize that its all in the assumptions. Any changes in the assumptions change the potential value of your investment fund. A Stretch IRA assumes:
You dont need the money, either before or after retirement. That's a big assumption.
You will take the smallest amount of money the law allows, and at the latest time it allows, without penalty (currently at age 70 1/2).
Your primary beneficiaries die early, before they can deplete the investment fund.
That tax laws will remain constant and not change.
That inflation is minimal, and will not significantly cut into your rate of return and the ending values of the account.
That your returns dont vary. Most Stretch IRAs assume a constant rate of return that can be projected accurately over the long term. In the real world, those investors in the stock market who got in six years ago and got out two years ago -- before the market crash -- will have a very different rate of return than those who started their investment portfolio two years ago.
Stretch IRAs are a great way to accumulate financial freedom for your heirs. But their true value depends on realistic assumptions being made and realized. Lots of things can happen that will stunt the growth of an IRA. And you have to be sure the account fits YOUR needs.
But that $213 million looks awfully attractive to me!
Saturday, November 29, 2008
NEW JERSEY’S DEATH TAX: WHAT ARE MY OPTIONS?
If you die with an estate greater in value than $675,000, your estate will pay New Jersey Estate Tax. In the past, the State’s estate tax was based on and equal to the credit that the federal government would give to an estate for estate tax paid to a state. Wow! That sounds complicated, right?
Well, not really. What that means in English is this, if an estate had to pay $10,000 to New Jersey for estate tax, the federal government would give the estate a $10,000 credit against the federal estate tax that the estate owed to the feds; accordingly, if the total federal estate tax would have been $100,000 without the credit, then the estate would owe New Jersey $10,000 and the feds $90,000. The state estate tax did not increase the overall tax liability of the estate.
On July 1, 2002, that all changed. Since a new federal tax law—passed in June 2001—increased the credit that the federal government gives an estate against federal estate tax and eventually eliminates the federal estate tax and since that same law reduces the credit that the federal government will give to an estate for estate tax paid to a state and eventually eliminates the credit, New Jersey’s estate tax would have disappeared, along with hundreds of million dollars revenue. So, on July 1, 2002, New Jersey passed a new law that freezes the State’s estate tax at the rate that existed on December 31, 2001.
Now, even though the federal government provides a reduced—and eventually no—credit for state estate tax paid, New Jersey will continue to receive its revenue. For some estates, this new law could actually increase the overall tax liability, notwithstanding the federal governments sweeping tax law, which was sold as the death to death taxes.
So, now that you know about New Jersey’s new tax law, how do you plan for it? New Jersey’s elder law attorneys have been discussing the planning options for several months now. Here are some of the options:
Relocate. One suggestion is that you move to another state where the estate tax isn’t so onerous or where there is no state estate tax. I don’t view this option as viable for two reasons. One, I think it’s unlikely that anyone—or at least very few people—would relocate in the twilight years of their life after having lived in a state for most, if not all, of their life just to avoid a death tax. Secondly, the state to which the person moves may—and probably will—change its estate tax law in a manner similar to the manner in which New Jersey modified its law.
Gifts. If you give assets away, the reasoning goes, those assets won’t be included in your estate for purposes of calculating the estate tax. The catch is, the gift must have been made three years prior to the date of death. If the gift was made within three years of death, then the gift is brought back into the estate for purposes of calculating the New Jersey Estate Tax. So, not only would the decedent have lost the benefit of the asset gifted during his/her life if he failed to live for three years after making the gift, the gift still would not escape the estate tax. Gifting is an option, but not a great option.
Credit Shelter Trust. Briefly, a married couple can draft trusts into their Wills that protect each spouse’s applicable exemption against the federal estate tax. In English, if the federal government gives a credit equal to $2,000,000 against federal estate tax, then the credit shelter trust will receive $2,000,000 of assets on the death of the first spouse. If the federal credit were $3,500,000, the trust will receive $3,500,000 on the spouse’s death, and so on.
If the credit against the State death tax is now frozen at $675,000, a trust could be drafted into the couple’s Wills that will be funded with $675,000, and the remainder of the estate of the deceased spouse can pass to the surviving spouse. This type of trust preserves each spouse’s credit against New Jersey Estate Tax and $675,000 of the federal credit.
What I think everyone can agree on is, the new law requires an estate plan to be reviewed if the estate is greater in value than $675,000.
Well, not really. What that means in English is this, if an estate had to pay $10,000 to New Jersey for estate tax, the federal government would give the estate a $10,000 credit against the federal estate tax that the estate owed to the feds; accordingly, if the total federal estate tax would have been $100,000 without the credit, then the estate would owe New Jersey $10,000 and the feds $90,000. The state estate tax did not increase the overall tax liability of the estate.
On July 1, 2002, that all changed. Since a new federal tax law—passed in June 2001—increased the credit that the federal government gives an estate against federal estate tax and eventually eliminates the federal estate tax and since that same law reduces the credit that the federal government will give to an estate for estate tax paid to a state and eventually eliminates the credit, New Jersey’s estate tax would have disappeared, along with hundreds of million dollars revenue. So, on July 1, 2002, New Jersey passed a new law that freezes the State’s estate tax at the rate that existed on December 31, 2001.
Now, even though the federal government provides a reduced—and eventually no—credit for state estate tax paid, New Jersey will continue to receive its revenue. For some estates, this new law could actually increase the overall tax liability, notwithstanding the federal governments sweeping tax law, which was sold as the death to death taxes.
So, now that you know about New Jersey’s new tax law, how do you plan for it? New Jersey’s elder law attorneys have been discussing the planning options for several months now. Here are some of the options:
Relocate. One suggestion is that you move to another state where the estate tax isn’t so onerous or where there is no state estate tax. I don’t view this option as viable for two reasons. One, I think it’s unlikely that anyone—or at least very few people—would relocate in the twilight years of their life after having lived in a state for most, if not all, of their life just to avoid a death tax. Secondly, the state to which the person moves may—and probably will—change its estate tax law in a manner similar to the manner in which New Jersey modified its law.
Gifts. If you give assets away, the reasoning goes, those assets won’t be included in your estate for purposes of calculating the estate tax. The catch is, the gift must have been made three years prior to the date of death. If the gift was made within three years of death, then the gift is brought back into the estate for purposes of calculating the New Jersey Estate Tax. So, not only would the decedent have lost the benefit of the asset gifted during his/her life if he failed to live for three years after making the gift, the gift still would not escape the estate tax. Gifting is an option, but not a great option.
Credit Shelter Trust. Briefly, a married couple can draft trusts into their Wills that protect each spouse’s applicable exemption against the federal estate tax. In English, if the federal government gives a credit equal to $2,000,000 against federal estate tax, then the credit shelter trust will receive $2,000,000 of assets on the death of the first spouse. If the federal credit were $3,500,000, the trust will receive $3,500,000 on the spouse’s death, and so on.
If the credit against the State death tax is now frozen at $675,000, a trust could be drafted into the couple’s Wills that will be funded with $675,000, and the remainder of the estate of the deceased spouse can pass to the surviving spouse. This type of trust preserves each spouse’s credit against New Jersey Estate Tax and $675,000 of the federal credit.
What I think everyone can agree on is, the new law requires an estate plan to be reviewed if the estate is greater in value than $675,000.
Tuesday, November 25, 2008
Probate Basics
The legal process of transferring of property upon a person's death is known as "probate." Although probate customs and laws have changed over time, the purpose has remained much the same: people formalize their intentions as to the transfer of their property at the time of their death (typically in a will), their property is collected, certain debts are paid from the estate, and the property is distributed.
Probate Administration
Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will. What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.
What Happens in Probate?
The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested. The basic process of probating an estate includes:
• Collecting all probate property of the decedent;
• Paying all debts, claims and taxes owed by the estate;
• Collecting all rights to income, dividends, etc.;
• Settling any disputes; and
• Distributing or transferring the remaining property to the heirs.
Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.
Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate. Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.
The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
• Fees of the personal representative;
• Attorneys' fees; and
• Court costs.
Probate Administration
Today the probate process is a court-supervised process that is designed to sort out the transfer of a person's property at death. Property subject to the probate process is that owned by a person at death, which does not pass to others by designation or ownership (i.e. life insurance policies and "payable on death" bank accounts). A common expression you may have heard is "probating a will." This describes the process by which a person shows the court that the decedent (the person who died) followed all legal formalities in drafting his or her will. What is often taught about the probate process is how to avoid it. The movement to avoid probate is primarily motivated by the desire to avoid probate fees. It is, in fact, quite possible to avoid the probate process completely. There are three primary ways to avoid probate and its protections: joint ownership with the right of survivorship, gifts, and revocable trusts. The probate system, however, exists for the protection of all the parties involved and the focus of this article is what occurs in probate.
What Happens in Probate?
The probate process may be contested or uncontested. Most contested issues generally arise in the probate process because a disgruntled heir is seeking a larger share of the decedent's property than that he or she actually received. Arguments often raised include: the decedent may have been improperly influenced in making gifts, the decedent did not know what they were doing (insufficient mental capacity) at the time the will was executed, and the decedent did not follow the necessary legal formalities in drafting his or her will. The majority of probated estates, however, are uncontested. The basic process of probating an estate includes:
• Collecting all probate property of the decedent;
• Paying all debts, claims and taxes owed by the estate;
• Collecting all rights to income, dividends, etc.;
• Settling any disputes; and
• Distributing or transferring the remaining property to the heirs.
Usually, the decedent names a person (executor) to take over the management of his or her affairs upon death. If the decedent fails to name an executor, the court will appoint a personal representative, or administrator, to settle the estate. The administrator will fulfill many of the same duties listed above.
Typically, people may leave property to any person they wish, and may make such designations in their will. However, in certain situations, depending on the relationship to the decedent and the laws of the state, the decedent's wishes may have to be overridden by the court. For example, in most states, a spouse is entitled to a certain amount of property. Furthermore, creditors may have a claim on the property of the estate. Each jurisdiction usually prescribes how long an estate must be open to give creditors an adequate time frame in which to present claims to the estate. The more complex and sizable the estate, the longer and more time-consuming this process can be.
The probate process itself also carries with it a number of costs that are usually paid out of estate assets. These costs include:
• Fees of the personal representative;
• Attorneys' fees; and
• Court costs.
Sunday, November 9, 2008
President-elect Obama's tax plan
Tax-Plan Highlights
Here are some of the details of President-elect Obama's tax plan.
INCOME TAX
Maintain current tax rates of 10% to 28% for most Americans. Reinstate top tax rates of 36% and 39.6% on joint income of more than $250,000 ($200,000 for individuals).
CAPITAL GAINS/DIVIDENDS
Maintain maximum rate of 15% for most taxpayers. Boost top rate to 20% for investors with income of more than $250,000. Under current law, taxpayers in the two lowest income-tax brackets pay zero capital gains in 2008, 2009 and 2010. Eliminate capital-gains taxes on start-ups and small businesses to encourage innovation.
RETIREMENT ACCOUNTS
Suspend mandatory distributions for those 70½ and older. Permit taxpayers to withdraw up to $10,000 from retirement accounts penalty-free; withdrawals would still be subject to income taxes.
NEW TAX CUTS
Tax credit of up $1,000 to offset Social Security taxes for low-wage earners. Eliminate income tax for seniors making less than $50,000. Double the tax credit for college expenses to $4,000. Create a 10% mortgage tax credit for those who don't itemize. Provide a $1,000 rebate funded by a windfall-profits tax on oil companies to offset high energy costs.
AMT
Maintain current exemption and index to inflation.
ESTATE TAX
Set exclusion at $3.5 million per person ($7 million per couple); keep rate at 45%.
SOCIAL SECURITY
Maintain current wage base of $106,800, indexed for inflation. Impose additional tax of 2% to 4% paid by employers and employees on earnings exceeding $250,000 -- but delay implementation for at least ten years.
CORPORATE TAX
Keep top rate at 35%; close corporate loopholes.
Here are some of the details of President-elect Obama's tax plan.
INCOME TAX
Maintain current tax rates of 10% to 28% for most Americans. Reinstate top tax rates of 36% and 39.6% on joint income of more than $250,000 ($200,000 for individuals).
CAPITAL GAINS/DIVIDENDS
Maintain maximum rate of 15% for most taxpayers. Boost top rate to 20% for investors with income of more than $250,000. Under current law, taxpayers in the two lowest income-tax brackets pay zero capital gains in 2008, 2009 and 2010. Eliminate capital-gains taxes on start-ups and small businesses to encourage innovation.
RETIREMENT ACCOUNTS
Suspend mandatory distributions for those 70½ and older. Permit taxpayers to withdraw up to $10,000 from retirement accounts penalty-free; withdrawals would still be subject to income taxes.
NEW TAX CUTS
Tax credit of up $1,000 to offset Social Security taxes for low-wage earners. Eliminate income tax for seniors making less than $50,000. Double the tax credit for college expenses to $4,000. Create a 10% mortgage tax credit for those who don't itemize. Provide a $1,000 rebate funded by a windfall-profits tax on oil companies to offset high energy costs.
AMT
Maintain current exemption and index to inflation.
ESTATE TAX
Set exclusion at $3.5 million per person ($7 million per couple); keep rate at 45%.
SOCIAL SECURITY
Maintain current wage base of $106,800, indexed for inflation. Impose additional tax of 2% to 4% paid by employers and employees on earnings exceeding $250,000 -- but delay implementation for at least ten years.
CORPORATE TAX
Keep top rate at 35%; close corporate loopholes.
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