Friday, April 29, 2005

Seeking out a CELA (Certified Elder Law Attorney)

If you think you have elder law questions, where to start? A good starting place would be to look for an attorney who has been accredited as a Certified Elder Law Attorney.

As a general rule, there are ethical considerations when an attorney claims to be an "expert" in any area of law. The public trust could be abused where the claimed expertise is either false or misleading. New Jersey and New York only allow an attorney to claim to be "specialist" in an area of law if they are certified by a program accredited by the American Bar Association ("ABA").

The National Elder Law Foundation is the only organization accredited by the ABA to certify an attorney as being a specialist in the area of elder law - a designation known as a Certified Elder Law Attorney or "CELA".

So, if you are searching for an elder law attorney, why not start with those attorneys who have taken the time and made the effort to become known as specialists in their field. A searchable database of Certified Elder Law Attorneys can be found at

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Thursday, April 28, 2005

Life Insurance Owned by the Spouse - an Alternative to the Insurance Trust

A question has been raised about the estate tax consequences of having a spouse own and be the beneficiary of a life insurance policy. Is this a way to successfully avoid estate tax? How does this compare to an Insurnace Trust? As with all things, the results depend on the facts.

Example: Husband (H) and Wife (W) are married with 2 young children. H is purchasing a term life insurance policy for $1 million dollars. The policy is intended to (i) pay off the mortgage if H dies, (ii) provide for college education for the children, (iii) provide for income replacement, if necessary. H and W live in New Jersey, where there is only a $675,000 exemption from estate tax. Including the insurance death benefit, H and W collectively have assets in excess of $1.5 million dollars.

H owns the Insurance and names W as the beneficiary. The insurance death benefit is includible in H's taxable estate. However, since the death benefit all passes to W, and there is no tax due on assets passing to a spouse courtesy of the unlimited marital deduction, there will not be any tax due. However, the problem with this scenario is that if W dies shortly after H, without having spent any of the insurance proceeds, then the $1 million is includible in her estate, and will be subject to estate taxes as her exemption is insufficient to cover the proceeds and the other assets.

W owns the Insurance and W is the beneficiary of the policy. The estate tax result is the same as above. H dies and W receives the insurance proceeds. W's taxable estate is now increased. If W dies shortly thereafter, the insurance proceeds are subject to estate tax - not in H's estate, but in W's estate. Another wrinkle is that W owns the policy regardless of H and W's continuing relationship - if H divorces W, W owns a $1 million policy on H's life, and H can do little about it; not a comfortable thought.

H owns the Insurance and names his Estate as beneficiary; A credit shelter trust is created in the Will. Here, H avoids the divorce scenario and may generate some additional tax savings. If the Insurance policy funds his credit shelter trust, H is ensuring that his exemption from estate taxes is fully utilized at his death; thus reducing the amount of assets that W's estate needs to shelter at her death. Even if W died shortly after H, the insurance proceeds payable to the estate and allocated to the credit shelter trust would not be subject to tax in W's estate. However, there is a risk in making your insurance payable to your estate - your probate estate (i.e. assets controlled by your Will when you die) is subject to the claims of your creditors; life insurance proceeds payable to a named beneficiary generally are not. Thus, if you have debts when you die (mortgage, credit cards, margin loan, unpaid taxes....); or there are claims against your estate as a result of your death (wrongful death from a car accident), the insurance proceeds payable to the estate must be used to satisfy those claims before it can be set aside for your beneficiaries.

W owns Insurance and names children and beneficiaries. This is a scenario to be avoided at all costs. Where W owns the insurance, H is the insured, and children (or anyone other than W) are the beneficiaries, then upon H's death, W is deemed to have made a gift of the full amount of the death benefit to the children - a taxable gift in our example. Also, the children now have the insurance proceeds - W does not. W does not have a right to those funds merely by virtue of being their mother.

An Insurance Trust is created to own the Insurance. H creates an insurance trust naming W and the children as beneficiaries of the trust. Since the proceeds are owned by and payable to an irrevocable trust, they are not including in H's estate. When W dies, she is merely a beneficiary of the trust, so the insurance proceeds are not included in W's estate. Since the insurance proceeds are not passing through the Will, they are generally not subject to the claims of creditors. W can be Trustee, and distribute the funds appropriately among W and the children. There are other non-tax benefits (see 4-20-05 post - A Non-Tax Argument for Insurance Trusts). The downside to the Insurance Trust are set-up fees and annual maintenance through a separate bank account and properly issuing contribution notices.

Conclusion - There is no right answer. If your spouse survives you for a long time and spends the insurance proceeds, the estate tax consequences are negligible. Making your estate the beneficiary may give you tax savings without the costs of creating another trust. However, given that insurance is a huge cash inflow that should be protected from the possibilities, investment in an Insurance Trust may be the best way to accomplish your goals.

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Tuesday, April 26, 2005

Medicaid Planning with your House - Married Couples

Another attorney called me today to chat about what to do with a married couple client who was consulting him about how to protect their house from being "sold for the nursing home".

It would be wrong to say that your house can't be sold to be pay for your long term care needs - it can. However, the Medicaid rules respect the central importance of a home for security and peace of mind for older Americans. With some understanding of the rules, you can act to protect your home.

If you are married and in need of long-term care, and your spouse is living at home, your home is deemed a "Non-Countable Asset" for Medicaid purposes. In simple terms, your house doesn't exist as far as Medicaid is concerned. You will be required to spend down your other assets to appropriate levels to qualify, but you can keep your house. Note that your other assets are generally any other asset that can be liquidated, whether in your own name, your spouse's name, or in joint name with any other person - excluding personal property.

So as long as the spouse is living at home, your house is protected from the costs of your nursing home care. The next question is what happens if the spouse is no longer living at home.

If the spouse living at home dies, and the house is in joint names, ownership passes to the spouse in the nursing home - and immediately becomes an available asset that must be spent-down before Medicaid may continue. Medicaid may also seek recovery of amounts already paid. A solution to this is for the spouse living at home to (1) change the deed to his or her own name, and (2) change their Will to leave the house to the children or other family members. The surviving spouse may have a Right of Election - the ability to take approximately 1/3 of the estate even though it has been left to other persons - that may impact how much of the house passes to the children, but you have minimized the risk that the entire house value will need to be spent down for Medicaid purposes.

Once the spouse living at home has changed the deed and his or her Will, it may be appropriate to consider transferring the home to the children. Making a gift of the home after Medicaid has been approved for the spouse in a nursing home does not affect that spouse's Medicaid eligibility, and it may avoid the right of election described above.

Considerations in making a gift of the house to the children will be left for another post.

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Monday, April 25, 2005

Joint Accounts - Misconceptions and Unintended Consequences

Oftentimes an older single client, or that client's child, will meet with me and tell me that they have already "done" estate planning or elder law planning because they have "put" one or more of their children on an account - i.e.: created a joint investment account or bank account, or created a joint tenancy in real estate.

There is nothing wrong with this per se - it just appears that many people are unaware or have misinformation about the consequences of creating "convenience" accounts.

Generally speaking, any joint account that titles the co-owners as "or", or as "joint tentants with rights of survivorship" will pass to the surviving co-owner upon death, regardless of any contrary instruction in any document, such as a Will. Note that a joint account that titles the co-owners as "and", or as "tenants in common" will not pass to the surviving co-owner on death; instead, one-half (or some other designated amount of the property) will pass under the decedent's Will, and the co-owner will keep his other part of the property.

Problem 1 - A Joint Account Contravenes a Person's Intentions in their Will. For example, Mom's Will leaves all her assets to Son and Daughter jointly. However, Son lives closer, so Mom adds Son to a joint account "just in case something happens". Mom dies. The joint account comprises 80% of Mom's estate - so Son gets 90% of the estate and Daughter 10% of the estate. Son and Daughter end up in court arguing whether or not Mom, by creating the joint account, intended for Son to have 90% of the estate, or if her intent was for the estate to be divided 50/50, as set forth in the Will. The family members never speak again, and the only ones who win are the lawyers. The sad result of this (true) example is that a "convenience" account ended up being anything but.

Problem 2 - Child Joint Owner has Creditor/Divorce Issues. Once again, Mom and Son have a joint account and the account comprises 80% of Mom's estate. Son owns a business that takes a turn for the worse, or gets a divorce. Son is deemed to own some or all of the joint account (depending on whether he is subject to civil litigation, bankruptcy or divorce), as his name is on the title. Mom probably didn't intend for son to "own" the account now; all she really wanted was for Son to be able to write checks if she got sick in the future. Instead, Mom faces the real possibility of losing some or all of her main asset due to the credit problems of Son. Does Mom have some defenses? sure. But better to avoid the situation altogether.

Problem 4 - Mistaken Belief a Gift Has Been Made and asset removed from Taxable Estate. In the above scenarios, the problems arose because Son was deemed to have an ownership interest in the account. Change the facts so that by adding Son to the joint account Mom intends to make a gift of 1/2 of the account to Son, thereby reducing her taxable estate. However, in completing an estate tax return, Mom will be deemed to have retained an interest in 100% of the account (as she, as a co-owner, may withdraw 100% of the account), unless Son can prove he contributed money to the account. Son here will get no credit from an estate tax perspective for merely being named as a co-owner on a joint account without making a contribution.

Problem 3 - Mistaken Belief Asset have been "Transferred" for Medicaid Purposes. If you are trying to qualify for Medicaid, merely creating a joint surivorship (or "or") account with Son does not get any of the account out of Mom's name. Here, Mom names Son as joint owner with rights of survivorship. By doing this, Mom and Son believe she has made a gift of 1/2 of the asset to Son, so that she no longer owns it for Medicaid purposes. However, Medicaid will deem 100% of the asset to belong to Mom, unless Son can prove he contributed money to the account or assets.

Solutions? The easiest solution for most of these cases is for Mom to have created a General Durable Power of Attorney naming one or more of her children to act in a fiduciary capacity on her behalf if needed during her lifetime, and a Will or Revocable Trust to transfer her property upon death. The General Durable Power of Attorney should allow the attorney-in-fact to make gifts in accordance with Mom's existing estate plan.

Alternatively, be sure to keep the "convenience" account small, and be aware of the fact that creating a joint account may create more consequences then you intend.

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Friday, April 22, 2005

Review your withholding - A Tax Refund is an Interest Free Loan to the IRS

Are you celebrating your refund? Just bear in mind that what you got back in the mail is your money. The government isn't giving you its money - it is simply returning to you money that you overpaid. So each time you got paid, you gave the government too much money. Instead of going into your bank account every 2 weeks, it went into the governments bank account. They have been using this extra money you gave them all through the year. And when they finally give YOU back YOUR money, they don't even have the courtesy to pay you interest for using your money all year.

Now I know a lot of people see their refund as found money. And in a sense it is, it is your money finding you again. But from a cashflow perspective, wouldn't it be nice if more of your money stayed with you throughout the year. Ideally, withholding should be a zero sum game - come April 15, you owe nothing and are owed nothing.

If you are a W-2 employee, this situation can simply be changed by taking charge of how much is withheld from each paycheck. Depending on the amount of deductions you have, you can adjust your withholding. The IRS has Publication 919 - "How Do I Adjust my Tax withholding" which will walk you through the proper withholding for you. You fill out a worksheet and your target withholding number appears. Go to your Human Resources office, fill out a new Form W-4, and the adjustment will be made. The IRS encourages this to be done. The stated purpose of the Form W-4 is:

"Purpose. Complete Form W-4 so that your
employer can withhold the correct federal income
tax from your pay. Because your tax situation may
change, you may want to refigure your withholding
each year."

The last time you filled out a W-4 was probably when you were hired. If you have gotten married, had a child, or purchased a home since then, chances are your withholding is way off. Do yourself a favor - Read Publication 919 - "How Do I Adjust my Tax withholding" and download Form W-4.

And for those of you who see your refund as forced savings, here is an idea: Set up a direct debit from your checking account to a savings account in the exact amount of extra money you are getting each paycheck by adjusting your withholding. Come April 15 next year, you will have the same pot of money, plus interest, and can celebrate your "refund" then.

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Wednesday, April 20, 2005

For you D-I-Y Taxpayers - Turbo Tax and your 1040

I am a D-I-Y ("Do-It-Yourselfer") taxpayer. This is not because I work with the tax law all day. It is more of a sense of financial closure for the year and a check as to where I have been. It also usally leads to budgeting and asset reallocation. For those of you who don't find a thrill in taxes, I still suggest that the best thing to do is to see your local CPA. But for the D-I-Y's out there, read on.

Now that the tax season is over for most of us, I need to send a big "Thank You" to Turbo Tax. The progression of electronic filing and the ability to prepare taxes on-line over the past several years is nothing short of revolutionary. Do you remember not being able to eat at the dining room table from March on as all the tax information was spread out, in (somewhat) neat little piles until the impending pressure of April 15 forced the calculator and pencil to be brought out. Much swearing and consternation would then occur, until finally, the form was done, and you would look in the mirror to see how much hair you had pulled out?

No longer. With Turbo Tax, it is like having a tax preparer right in your living room for about $30.00. Just take your piles (whether from the dining room table or elsewhere) and start answering questions. The questions take you on a walk through the tax code to report all your income, and even better, collect all your deductions. Even for non-tax types, the process is close to fun. As you answer questions, more questions are asked. For the curious types, you even can find out all about new sections of the tax code. As you go along, you see a running tally of your taxes - or even better, your refund amount. (Having said that, if you got a large refund, you just gave an interest free loan to the government - my, aren't you generous. Take a look at your exemptions to keep more money as you go along during the year).

And the following year, you just update the information from the last year. So, if you haven't changed jobs or had some major investment turn over, it is really just a question of updating some numbers, hitting send, and waiting for the check to hit your bank account - or wait until April 15 to drop your check in the mail.

If you used an accountant this year, and think that taxes are one of those things that you should be able to do yourself, take a look at Turbo Tax come February of next year (don't wait until April when the weather might be nice).

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A Non-Tax Argument for Insurance Trusts

As I was discussing with a new client yesterday, there are many reasons for an insurance trust other than tax motivations. The key reason is asset protection planning - the same reason for most any planning.

An Insurance Trust is simply a trust that own and is the beneficiary of life insurance. The proceeds from a properly structured insurance trust will be outside of your taxable estate. Most people are generally unaware that the death benefit from insurance proceeds is part of your taxable estate if you own the policy. You may not feel it today, but you may be rich when you are dead because of your insurance - so rich in fact that your insurance may create a taxable estate - and thereby inadvertently naming Uncle Sam, or Aunt NJ or NY, as your beneficiary. If the trust owns and is the beneficiary of your insurance, it will not be part of your taxable estate, although it will pass to beneficiaries of your choosing as part of your estate plan.

As a general rule, assets held in a trust cannot be reached by a beneficiaries' creditors, or by a spouse in the event of a divorce. This means you can do something for your heirs you can't do for yourself - put assets in a trust and have them beyond the reach of creditors. It also means you can do something for your kids without a fight - protect the assets you leave to them in the event of a divorce down the road.

Also, in New Jersey, a person can be a sole Trustee and a beneficiary. A Trustee/Beneficiary may only make a principal distribution from a trust for his or her benefit if that distribution is limited to health, education, maintenance or support. But a Trustee may have unlimited discretion to make distributions to other beneficiaries of the trust. For example, a surviving spouse can be the Trustee of the insurance trust, and the surviving spouse and children the beneficiaries. This allows the surviving spouse to control the investment and disbursement of the family assets, all while protecting the assets from creditor claims, children's marriages, or even the remarriage of the surviving spouse.

Another reason is one of pure practicality - insurance proceeds are paid over in large lump sum checks, and most people don't do well with large lump sum payments (think of lottery winners who are broke 2 years later). For most working people, not matter how wealthy, most of their net worth is illiquid - either because it is tied up in a non-liquid investment (like your home), or because it is mentally deemed a long term investment and therefore off-limits (like your retirement nest egg). This is not so with insurance proceeds - a claim is made and a check with a lot of zeros appears in the bank account. What would you do if you got a huge sum of money? Couple this with the fact that your beneficiaries are emotionally adrift as you have just died. Having the proceeds payable to a trust creates structure for your family going forward.

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Tuesday, April 19, 2005

Repeal of the Estate Tax - What new Tax will there be?

Once again Congress is debating repeal of the Federal Estate Tax. The usual reasons are thrown around: "a death tax is unfair", "it kills small businesses and farmers", "it is double taxation". All this over a tax that impacts 2% of Americans to pay.

My questions is this - if the "death" tax is repealed, what will take its place? The tax will generate $750 billion over the next 10 years. If it is repealed, what will take its place. The government is already running record deficits. And the government, being a government, will always find ways to replace revenue. So what happens when the estate tax is repealed - it is essentially replaced by capital gains tax.

As written currently, Section 1014 of the Code essentially allows a step-up in basis for all property included in decedent's estate (with the main exception of assets such as an IRA that shelter un-taxed income). This means that when you die, any unrealized capital gains, or untaxed appreciation, is wiped out, and your heirs start with a clean slate. If there is no estate tax, there is no step-up in basis. If there is no step-up in basis, the heirs receive the decedent's basis in an asset.

This doesn't sound so bad until you have to figure out what the basis is. What did granddad pay for all of his shares of IBM, gathered over the last 30 years? What happens if you can't show basis? Are you taxed on the full value of the assets on sale? What record keeping will suffice?

The federal long term capital gain rate is 15%. New Jersey's capital gain rate is an additional 6.37%, and New York's is an additional 6.85%, for a combined capital gains rate of almost 22%.

Congress has partially addressed this issue under the current law, stating that in 2010 (the current year of estate tax repeal) that a person will have up to $1.3 million of step-up in basis (with an additional $3 million for assets passing to a spouse). The basis in the remaining assets will be the decedent's basis, which may be $0 if it can't be proved.

One thing that the current estate tax has going for it is finality. A person dies, the assets are gathered and valued, tax is calculated and paid, the assets are distributed, and from a taxation standpoint, you don't really need to look to the decedent again - just the estate tax return. With the loss of the step-up in basis, a whole new host of issues will be created as taxpayers who inherit property seek to maximize basis in that property to minimize tax.

Another positive point of the current estate tax is that under current law, there is no tax on assets passing to a spouse. Under the revised law, the spouse will owe capital gains on assets received in excess of $3 million.

Finally, don't forget that even with the repeal of the federal estate tax, New Jersey and New York will continue their own estate tax.

For good or for bad, the repeal of the federal estate tax is going to be a tradeoff where dollars will be coming to the government from one pocket instead of another.

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