Future Financial Planners: Where We Are Now - Federally, Statewide & With Medicaid

(A) Federal Estate Taxes

1. Unified Credit - The federal unified credit to which all persons are entitled stands at $3,500,000 (a tax savings of $1,440,000) for 2009. According to current enacted law, the federal estate tax is to disappear in its entirety for 2010 only. In 2011, the unified credit is reinstated at $1,000,000 (a tax savings of $345,800).
2. Federal Tax Rates - The maximum federal estate tax rate is 45% for 2009, 0% for 2010, and 55% for 2011 and thereafter.
3. What Will Likely Occur - Given the economic clime, government pronouncements indicate that the disappearance of the federal estate tax for next year (2010) will not occur; rather, the $3.5 million unified credit now in effect will continue through 2010 with the maximum federal estate tax rate of 45% likely to continue as well. Nothing has been said about 2011, and thereafter, when the $1,000,000 credit is reinstated with a 55% max tax rate.
4. Carryover Basis - One of the hidden advantages of the estate tax has been the "carryover" basis. This means that the new basis for assets in an individual's estate becomes the value as of the date of death. This, according again to current law, is slated to disappear in 2009 with the basis being what the basis was in the hands of the decedent having no relation to the date of death value. Congress tried this once before in the late 70's only to find it did not work. They, therefore, withdrew it after less than a year. I believe that the carryover basis will continue into the foreseeable future.
5. Gift Tax - As of January 1, 2009, the annual gift tax exclusion rose to $13,000 per person per calendar year from the prior years $12,000 exclusion. It is surprising how many people are still fixated on the $10,000 per year annual exclusion which has not been in effect for a number of years, as the exclusion is now tied into inflation. When inflation approaches the next nearest $1,000, the exclusion amount will rise likewise to $14,000.
   
   Unfortunately, the $1 million lifetime gift exemption (which covers gifts which exceed the annual exclusion) is still in effect - and is not likely to rise in the future. The effective use of annual exclusions ($13,000 now) can be a valuable estate planning device; many times it is even utilized on the death bed by the issuance of checks in that amount to as many individuals as the person desires, since there is no carry back into the estate for the annual exclusions. However, be warned that if the gift exceeds $13,000 to any person, the excess over the $13,000 is grossed back into the estate and added to the other assets included in the estate.

(B) State Death Taxes

1. New Jersey State Inheritance Tax - New Jersey state inheritance taxes have remained unchanged with Class A beneficiaries (spouse, children, parents, grandparents, etc.) exempt from any inheritance taxes regardless of the amount they receive from the decedent with Class C (brother or sister of the decedent), and D (all others) to be taxed as previously established. Class E beneficiaries are those non-profit organizations generally found under Internal Revenue Code 501(c)(3) entities - charitable, historical, educational, etc. and are tax exempt.
2. New Jersey Estate Tax Credit - Due to the elimination of the federal state death tax credit and the state's desire not to lose the income derived therefrom (which approximated 5% of the taxes brought into the state each year), the State of New Jersey froze the credit at $675,000 (as a matter of interest, New York froze the credit at $1,000,000). What this means is that property passing to anyone but a spouse will be taxed if the amount passed exceeds $675,000. This, so it seems, is a "hidden" tax which many people miss. Most taxpayers feel that, if their estate is under $3,500,000, they have no problem from an estate tax standpoint, yet $3,500,000 passing to children, will result in an approximate New Jersey estate tax of over $230,000. At $1,000,000 the New Jersey estate tax is approximately $33,000. This tax obviously affects smaller estates as well, and it might be advisable to establish trusts in the first estate which would insure that the second estate has no more than $675,000 in it if possible, when it passes to children or other beneficiaries, i.e. through use of credit shelter by pass, or disclaimer trusts.

(C) Planning Devices

1. Powers of Attorney - In the event of a disability during lifetime, unless a Power of Attorney is in effect, the assets of a disabled non-competent person will, in essence, be frozen until somebody is authorized or empowered to act on behalf of the disabled or non-competent party; this is through a court action for a guardianship or conservatorship, which may take 3 to 6 months (or even longer), and is very costly as well.
   
   Obviously, the Power of Attorney is the more desirable, for this way you get to choose who you want to act for you as regards your financial future. Your Powers of Attorney are usually general Powers of Attorney, in that they cover all aspects, assets, and powers the disabled/incompetent party possessed prior to the onset of disability.
2. Living Will with Medical Power of Attorney - This document governs how you are to be taken care of when you can no longer indicate that fact on your own; also the Living Will (sometimes called a "health care designation") is usually combined with a medical power of attorney naming someone who will make those health care decisions for you. What this "Living Will" is meant to do is remove the decision-making ability from the doctors and hospitals reposing it in the people whom you want to make those decisions.
3. Long Term Health Care - For years I have been proselytizing the obtaining of long-term health care insurance as being the main device protecting an individual's assets for the period from retirement to date of death. As we live longer, the likelihood of our being in a nursing home at some time during that period becomes greater and greater, and the expense expanding exponentially. I strongly suggest that you explore the feasibility of this form of policy with all your clientele.
4. Life Insurance - Most of our clients own life insurance in some form or another, whether it be company owned or individually owned. When first purchased, life insurance is meant to replace income; it is usually maintained later on in life to meet estate tax costs. Since the estate tax credit has expanded tremendously since it was established in the late 70's (the unified credit was first established at a level of $600,000 and remained so for approximately 25 years), it remained a wise thing to do. However, with the credit now being $3.5 million and likely to be so for next year as well, the need for life insurance to meet that death tax cost has diminished substantially, yet the need is still there, I believe.
   
   People miss the fact that they will never live long enough to pay in as premiums the face amount of the life insurance policy, therefore what is received by the heirs at death, i.e. the face amount of the policy, is never equal to the premiums which were paid in during lifetime. Therefore the policy, in essence, enables the heirs to receive a "return," so to speak, in the amount invested in the policy, i.e. the premiums paid. If estate tax costs must be met, then it is done so with these discounted dollars.
   
   It is also important to note that life insurance, though usually income tax free, is not estate tax free and is fully includable in the estate of the decedent, if the decedent maintains ownership, or incidents of ownership, of said policy. It is extremely important that we as planners not expand the estate of an individual by having that individual, or even his spouse, if he is married, own this life insurance policy. It should be owned by an Irrevocable Life Insurance Trust which, if it is a new policy and established correctly, will keep said policy out of the estate from day one, as opposed to a policy which is being assigned to the Trust after it has been issued, wherein a three year trap awaits.
   
   I am cautioning all of my clients not to cancel any of their life insurance which was purchased for estate tax purposes, since the credit is being reduced to $1,000,000 according to law for 2011, and thereafter, which is not a substantial amount.
5. Wills - All individuals, if they have any property whatsoever, or if they have minor children, should have Wills, be they simple in nature (where everything passes to the surviving spouse on the death of the first party, and then passes either outright or in trust to or for the benefit of the minor children of the marriage after the second spouse), or more complex tax-planned Wills such as disclaimer trust Wills, credit shelter trust Wills, QTIP Wills, etc. (which are meant to fit certain circumstances and preferences based upon the size of an individual's estate and their marital status).
   
   Many people miss the fact that by not having a Will, they are costing their estate money, for an administrator will have to be appointed by the court in lieu of an executor with the administrator having to be bonded. This surety bond is renewable each year with the premium dependent upon the value of the assets in the estate; it may run from $500 per year up to many thousands per year. If that same individual had even a simple Will at the time of their death, the necessity for the bond is eliminated.
6. Trusts - There are many and varied types of Trusts currently in existence with, I am sure, new ones being contemplated as laws change. Trusts break down into two general categories: (1) a Revocable Trust - meaning that the Trust (and any item therein) can be changed, modified, cancelled, etc. until death, at which time it generally becomes irrevocable, and, (2) an Irrevocable Trust which is for all intents and purposes, unchangeable once it has been established.
   
   Irrevocable Trusts are the only trusts which should be used for the ownership of life insurance for the irrevocability of it, if properly done, will remove the value of the insurance from the estate of the insured yet still keep it available during the surviving spouse's lifetime for that surviving spouse's benefit while passing it to the children estate tax free. The Irrevocable Life Insurance Trust is what keeps life insurance sacrosanct, and 100% available for the surviving spouse, and the decedent's children and/or grandchildren.
   
   Living Trusts or Revocable Trusts are most useful in the State of New Jersey if an individual owns real property outside the State of New Jersey for, unless that property is owned by the Living Trust, a probate must be done in each state in which real property is owned. It can be an expensive and aggravating procedure requiring the use of attorneys in each state in which real property is owned. By having the Trust as the owner of the out-of-state real property, the real property interest becomes a trust interest and is treated as any other personalty (bank accounts, stock accounts, etc.). Therefore, it is governed by the terms of the Trust within the state in which the decedent is a resident at the time of death eliminating ancillary probate's in other states.

(D) Senior Planning

1. Estate Planning - It should be the first goal of you, as financial planners, to insure that your clients have a valid, existing, and current estate plan which fits all of their needs; i.e., to not be satisfied with the phrase "I already have a Will". Whatever documents they have, i.e. Wills, Powers of Attorney, Living Wills, Trusts, etc. should be reviewed in their entirety to make sure that they are both current, based upon the changing status of the law, and upon their own individual circumstances. Life is not static, as you know, and neither should the estate plans be so. The devices outlined above, plus others, are available to meet your clients' needs.
2. Lifetime Planning - There is a tremendous confusion amongst our clients, understandably so, when it comes to the fact of the $13,000 annual exclusion, versus how said exclusion is treated for Medicaid purposes. You must note that the two are mutually exclusive. One has nothing to do with the other. For estate tax purposes, as pointed out above, the sum of $13,000 per calendar year can be given to as many people as you desire, yet if that $13,000 gift is given, and Medicaid is applied for within sixty (60) months of having made that gift, then Medicaid will be denied for approximately two months for each $13,000 gift made based upon the 2009 monthly nursing home care amount established by the state, i.e. $6,655. So please insure that your clients do not confuse the estate and gift tax law with the Medicaid law.
3. Annuities - If there was ever a yo-yo in elder law planning, it has to be the annuities. First they are counted, then they are not counted. Now they are being counted once again regardless of whether they are actuarially sound, (meaning that the payments were certain for the lifetime of the annuitant and computed over the lifetime of the annuitant, and, if there is a sum leftover following the annuitant's death, then that amount would go to reimburse the state. As it stands now, annuities are fully a fully countable asset when you apply for Medicaid.
4. Monthly Nursing Home - The monthly nursing home allocation sum for 2009 is $6,655. This figure changes annually and has a great import in our elder law planning. For instance if, within 60 months of applying to Medicaid a gift of $66,550 is made to one or any number of persons, then Medicaid benefits would be denied for at least a ten month period, even if you have no assets at the time of application, i.e. the $66,550 gift would be divided by the monthly nursing home care amount of $6,655, giving ten months of ineligibility. That is how the ineligibility period is determined, i.e. by dividing the amount gifted by the monthly nursing home care credit in effect at the time Medicaid is applied for. There is no "outer limit" to this amount meaning it is solely determined by the amount of property which is gifted during that 60 month period prior to Medicaid application.
5. Home Equity Limitation - In New Jersey, if the equity in your home exceeds $750,000, Medicaid benefits may not be available to you. Other states have lowered this limit to $500,000 but New Jersey seems likely to adhere to the $750,000 level.
6. Estate Recovery - Although not a well known aspect of the Medicaid law, the state can recover from a decedent's estate the amounts paid for Medicaid which remain unreimbursed at the time of the decedent's death. I am sure that this will be enacted more forcefully as time goes on. The reason is obvious.

• The avenues previously used to maximize what we pass to our heirs and minimize what the government is entitled to when Medicaid benefits are sought are becoming fewer and fewer each year, and this is likely to continue. The government is expecting us to pay our own way with our own assets regardless of what we want to leave to our children or other heirs. The government simply cannot afford to pay Medicaid benefits for all of the elderly who want them; the reason for this is also obvious since there are likely to be more of us as time goes on and life expectancy increases. More than ever this points out the importance of long term health care insurance and it is something which should be stressed to all your clientele.