Mon, 26 October 2009
Let’s pick up where we left off with Mary. Her son, Jim is unemployed and Mary has been giving him funds totaling $50,000 over the last 6 months to help him pay his bills. And she intends to continue doing so until he finds a job. While Mary is 70, healthy and not thinking she’ll ever need long term care, I explained to her that if her health takes a turn, the transfers to Jim will make her ineligible for government benefits should she run out of money. That is a very real possibility, with the cost of care currently averaging over $100,000 per year in her area. So what can we do?
We can set up a trust to which Mary transfers assets. The trust then provides the funds to Jim. Now, you may be thinking, “doesn’t this create the same problem Mary already has by giving Jim money each month or two?” Yes, but by having Mary transfer the money in one lump sum Medicaid’s 5 year lookback is applied one time so we know when it will expire. If she transfers a little bit at a time Mary creates a new 5 year lookback for each separate transfer. But isn’t there a potential Medicaid penalty when the trust gives money to Jim? No, because Medicaid only looks at Mary’s transfers, not the trust’s.
Some may read this and conclude that this is just a way for Mary to avoid using her money for long term care and have the government pay her bills instead. But is that really what is going on here? Cleary not. Mary isn’t even thinking about long term care (although she clearly needs to). Through the use of a trust she can accomplish both goals, helping her son get back on his feet and providing for her own needs. If she gets sick she’ll definitely need to use some of her funds for her own care but when she spends down completely, if done properly, she will be ready for Medicaid. And that benefits not only Mary, but also the providers of her care who will receive those benefits, whether it be a nursing home, assisted living facility or home health care agency.
The long term care provider will know that after Mary spends down her assets she will qualify for Medicaid without any surprise ineligibility periods imposed by Medicaid. And Mary will know that she can be there for her family and still meet her own needs. Mission accomplished.
Mon, 19 October 2009
Mary had been reading my blog posts for some time now about the need to plan ahead for long term care. Something struck a chord with her and she called. She has a home and about $200,000 in investments. While still healthy, she is 70 and thinking about the future. I then asked her if she had made any gifts to her kids or grandkids. She replied, “No gifts but I am helping out my son Jim a little bit because he has been out of work for 6 months”.
“Well, Mary, actually, the money you are giving your son may disqualify you for government benefits down the road, should you need them”, I explained. Mary became exasperated. “Jim has had such a tough time finding a job in this economy. How can the government tell me I can’t help my family when they are in need?” The reason for this, if you have been reading my posts over the past number of months, is the Medicaid spend down rules. The government wants you to spend your money on your own long term care first, before asking for assistance.
Now, not all your money must be spent on long term care. But it must be spent in such a way that you are getting something of equal value back. Mary heard this and in an exasperated tone cried, “what could provide me greater value and satisfaction than helping to keep a roof over my son, daughter-in-law and grandchildren’s heads and food on the table, until Jim can get back on his feet? My parents helped us out when my husband lost his job. In tough times our family has always pulled together and pitched in. Jim is a good son. He just needs a break.”
While you and I may view Mary’s help as essential and proper, unfortunately the government does not. Mary estimates that she has given Jim $50,000 over the last 6 months and intends to continue to do so. Right now, however, she has a potential Medicaid penalty of about 7 months and that will only increase if she continues to advance funds to Jim.
Mary is really getting agitated now. “So are you telling me I have to stand by and watch Jim lose his house -- that I can’t do anything?” “Not at all”, I replied. “You can be there for Jim, but we have to do it in a way that won’t create long term care problems for you down the road.” In next week’s post I’ll share with you what I told Mary.
Mon, 12 October 2009
A few months back I wrote about how estates up to $3,500,000 are not subject to federal estate tax and that the tax will be eliminated in 2010. For this reason, when people call our office to discuss estate planning they will often begin by saying that they are not concerned about estate tax. I have to correct them, however, because most states have their own estate tax that may kick in on smaller estates where the federal tax isn’t a concern. So, how big might such an estate tax bill be?
First, a little background. Under the previous law, Congress permitted a dollar for dollar credit towards the federal estate tax for any state estate and inheritance taxes paid up to a certain limit. So, many states established their estate tax structures to “soak up” the maximum credit that Congress permitted. In essence, the federal government shared a portion of its tax revenue with the states. When it raised the federal exemption, however, Congress decided it could no longer share a smaller tax revenue with the states so it phased out this credit. Many states, in response, changed their tax laws to preserve their revenue stream. New Jersey now has an estate tax that kicks in on estates greater than $675,000 and New York on estates greater than $1,000,000.
New Jersey’s estate tax starts out at 4% and gradually increases to a maximum of 16%. New York’s estate tax also maxes out at 16%. As I explain to our clients, we usually see federal estate taxes in the six figure to seven figure range and state estate taxes in the tens of thousands of dollars on the low end, and hundreds of thousands of dollars on the higher end.
What can you do to reduce, or even eliminate this tax? Well, for starters, in the case of married couples, a bypass or credit shelter trust should be employed. This will save substantial amounts of tax that would be paid by children at the death of the second parent to die. But you must have this trust set forth in your will before you pass away.
What if that opportunity has already passed? Purchasing life insurance to pay the tax is another solution, which may be especially desirable where the estate consists of real estate that the family doesn’t want to sell just to pay the tax. And, placing that insurance in a life insurance trust is usually a good idea. Otherwise, you end up paying estate tax on the life insurance that you bought to pay the tax in the first place.
Category:Estate tax -- posted at: 6:00am EDT
Mon, 5 October 2009
On September 1, 2009 New York’s new power of attorney law became effective. There has been much written about it. The intent of lawmakers was to correct the financial abuses that seem to increase in frequency, probably due to the aging of our populace. As with any new law, however, what lawmakers envision and what actually occurs often differ greatly. But, what does the new law mean for you?
First, let’s run through the major changes. One of the biggest changes is the creation of a “statutory major gifts rider”. This is a document separate from the power of attorney that specifically authorizes major gifts and other transfers (defined as greater than $500 per person per calendar year). No longer can the principal (the person executing the power of attorney) authorize gifts in the body of the power of attorney document. This will impact many long term care plans in which assets are placed in trust, for example. If the principal can no longer make the transfer and a child, as agent under power of attorney, needs to complete that transaction, New York law now requires this separate rider.
A second important change focuses on the execution of the document. Now the principal and the agent must sign the document in front of a notary and two disinterested witnesses. The signings need not, however, occur at the same time. The agent may sign at a later date than the principal.
A third major change is one that at first might not seem like much. Any new power of attorney automatically revokes all previous power of attorney unless the principal expressly states otherwise in a special “modifications” section. This could really wreak havoc upon estate and long term care plans. Think about it. How many times have you gone into a bank and executed a limited power of attorney appointing a family member as agent for a particular account? If that document doesn’t expressly state your wish not to revoke your general power of attorney or any other limited power of attorney that you signed previously then they all are revoked. What if the bank employee doesn’t point this out to you? They may not even be aware of this provision.
It will be interesting to see what impact the new law will have. Will it correct financial abuses of the elderly? Will it be too restrictive and hamper families in their ability to care for elderly members? Will there be any unintended consequences that nobody foresaw? And will other states follow suit? One thing should be clear. Consult your elder or estate planning attorney before you execute any other powers of attorney.