Quarterly Newsletters

March 2007: Something New About Living Trusts

The benefit of practicing only one area of the law, as opposed to being a general practitioner, is that everyday you are focusing on one thing and, surprisingly, learning new things. I'm always surprised how many of the rules and regulations governing elder law is passed on verbally, from attorney-to-attorney.

This past week, a group of elder law attorneys were discussing the benefits of using revocable living trusts in the estate plans of clients versus using a last will and testament.

As those of you who read my column know, I'm not a big fan of revocable living trusts. One reason - and admittedly, perhaps, the primary reason - is that I fancy myself a contrarian. If someone says something is the best thing since slice bread, I like to point out to them how it is not.

Now, this is not to say that I don't use living trusts in my practice. I do and quite frequently. I primarily recommend the use of living trusts to my clients when they own real estate in another state, such as Florida. The use of living trusts in this situation can avoid the need to probate the client's Will in Florida after they die. Since probate in states other than New Jersey can be costly - New Jersey's probate process is very quick, efficient, and inexpensive - it is worthwhile attempting to avoid the need to probate a Will in a foreign state.

My “problem” with living trusts is that typically when a person comes in wanting a living trust, they have read some book or attended some seminar from which they have walked away with the impression that a living trust can cure cancer. Probably because the author or speaker was attempting to give the impression that living trusts can practically cure cancer.

This past week, I learned from a discussion I had with other elder law attorneys that New Jersey's Division of Taxation does not issue waivers for property held in revocable living trusts and does not require financial institutions to seek the production of a waiver from a trustee. What?

What that means is this: When an individual dies with an estate that has a gross value in excess of $675,000 or when an individual dies and leaves part or all of his estate to individuals other than his spouse, parents, children, or grandchildren, then his estate must file either a New Jersey Estate Tax Return or a New Jersey Inheritance Tax Return, or both. Frequently, the estate must pay estate or inheritance tax, or both.

When the return is filed and the tax is paid, the Division of Taxation issues waivers, which are forms that indicate to financial institutions that the tax on the estate has been paid. Prior to the waivers being issued, the financial institutions can only release one-half of the decedent's money to the executor.

The process of being appointed an executor of an estate (that is, probate) and of filing the tax return, paying the tax, and obtaining the waivers can take many months. So, the ability to obtain all of the money from an account without having to wait for probate (which might take two weeks) or a waiver (which might take four months) is of some benefit.

However, here is how I think it is a detriment.

First of all, even if the executor has to wait for a waiver, he can still obtain one-half of the account after he is appointed executor, which would be about two weeks after the individual dies. Not a long wait.

Secondly, and most disturbing to me, if a person does not have to obtain a waiver to gain access to the accounts of the decedent, in my opinion, that person might believe that no tax is owed on the estate. This is completely untrue. The assets in the trust are still subject to the same taxes as assets outside of the trust (estate tax, inheritance tax); it is simply that the director does not issue a waiver for these assets.

In my opinion, many trustees might be lulled into believing that there is not tax. But they will be in for a rude awakening when they receive a notification of failure to pay the tax (which are sent out frequently) and learn that the estate is being assessed penalties and interest for failing to file timely the appropriate tax returns.


Recently, the Appellate Division of the Superior Court of New Jersey decided an interesting case dealing with Medicaid eligibility and the unavailability of an asset.

Medicaid pays for long-term care - for instance, care in a nursing home or an assisted living residence. Medicaid is a welfare program. In order to qualify for Medicaid, a person must have a limited amount of resources, typically, less than $2,000.

In I.G. versus the New Jersey Department of Human Services, the issue before the court was whether or not the cash surrender value of three policies of life insurance counted against the $2,000 limit.

I.G., a resident of a nursing home, owned three policies of life insurance. In the aggregate, the cash surrender value of the three policies of life insurance was $5,900, which is $3,900 over the $2,000 Medicaid asset limit.

I.G. had a daughter and a granddaughter; however, other than abscond with some of I.G.'s money, her family did little to assist with the filing an application for Medicaid benefits and did nothing to liquidate the policies of life insurance. Since I.G. suffered from dementia and was confined to a nursing home, she was incapable of liquidating the life insurance policies herself. I.G. did not have a guardian appointed for her and the Court's decision made no mention of I.G. ever having executed a power of attorney.

Eventually, the nursing home in which I.G. resided filed an application for Medicaid benefits on I.G.'s behalf. By the time the nursing home filed the application, the nursing home was owed tens of thousands of dollars for the care that it had provided to I.G.

This application for Medicaid benefits was denied. The County Board of Social Services found that the cash surrender value of I.G.'s life insurance policies placed her over the $2,000 asset limit for Medicaid eligibility. The nursing home appealed the County's decision, and an Administrative Law Judge agreed that because I.G. lacked the mental wherewithal to liquidate the life insurance policies and because I.G. did not have a guardian appointed for her, the cash surrender value of her life insurance policies was unavailable to her; accordingly, the cash surrender value of the life insurance policies did not count towards the $2,000 asset limit.

As is the case with all such decisions, the Director of Medicaid reviewed the Administrative Law Judge's decision and rejected it, holding that the cash value of the life insurance policies was available to I.G., disqualifying her from Medicaid.

The Appellate Division reversed. The Appellate Division held that because I.G. was mentally incapacitated and because she did not have a legal guardian appointed for her, the cash surrender value of the life insurance policies was unavailable to her through no fault of her own. As such, the cash surrender value was an excluded asset and did not count towards I.G.'s eligibility for Medicaid benefits.

I agree with the Court's decision in I.G. and believe that the decision could have broad implications.

Many of the people looking to qualify for Medicaid benefits reside in a nursing home and are either mentally or physically incapable of assisting themselves. Most of the people who reside in nursing homes would find it impossible to handle effectively their financial affairs.

From time-to-time, mentally incapacitated nursing home residents do not have family members who are willing to assist them with their financial affairs. The I.G. decision stands for the proposition that in situations such as the one described, the assets will remain excluded until such time as a legal guardian is appointed for the nursing home resident who can assist her with liquidating her assets.


For disabled individuals under the age of sixty-five, there exists a significant planning opportunity.

For those people who are under the age of sixty-five and disabled, public benefits such as Supplemental Security Income (SSI) and Medicaid can often be obtained by placing assets into a self-settled special needs trust.

Disability is defined for this purpose as the inability to engage in substantially gainful employment as the result of a physical or mental illness that is expected to result in death or persist for longer than twelve months. SSI is a cash-assistance government program. The current federal benefit is $623 per month and there is a small state supplement. SSI is intended to pay for food, clothing, and shelter items. Finally, Medicaid is a health insurance program; however, unlike traditional health insurance plans, Medicaid pays for the costs of long-term care, such as home health aides, assisted living residences, and nursing homes.

In some cases, disabled individuals under the age of sixty-five are disqualified from SSI/Medicaid because their income from other sources (such as Social Security Disability Income, long-term disability, worker's compensation, or pensions) is too high to permit qualification for these programs. There is little that can be done with excess income; however, for those individuals with limited income and assets too high to permit qualification, the self-settled special needs trust can be the answer.

In order to qualify for the SSI/Medicaid programs, an individual must have less than $2,000 in countable assets. Countable assets are all assets except non-countable assets. Non-countable assets are the house, a car, personal goods and household effects, and small policies of life insurance.

So, let's assume the following facts, disabled man (Mr. Smith) who has schizophrenia. Mr. Smith is forty years old. Mr. Smith has held sporadic jobs throughout his adult life; however, due to his illness, he has never been able to maintain employment. In total, Mr. Smith's employment has been for fewer than ten years; accordingly, Mr. Smith does not have a sufficient amount of quarters of employment to qualify for the Social Security Disability program, which would provide him with a source of income based upon his work-history earnings.

Mr. Smith has accumulated assets of $60,000, primarily through inheritances that he has received from family members. Because Mr. Smith has more than $2,000, he does not qualify for the SSI/Medicaid programs; accordingly, Mr. Smith has no source of income and no health insurance of any nature whatsoever.

Based upon these facts, Mr. Smith could qualify for the SSI/Medicaid programs if he were willing to place his assets (the $60,000) into a self-settled special needs trust. As odd as this may sound, the trust is funded with Mr. Smith's assets but can only be established by a court, a parent or grandparent of Mr. Smith, or Mr. Smith's legal guardian, if he has one.

The trust must contain a payback provision, which requires any money remaining in the trust at the time of Mr. Smith's death to be paid-back to the State for Medicaid benefits that the State paid on Mr. Smith's behalf during his life. Money remaining after the payback can pass to Mr. Smith's family in accordance with his wishes.

Once the money is in the trust, Mr. Smith will qualify for SSI and Medicaid, and the trustee of the trust (perhaps a family member of Mr. Smith) can use the money in the trust to supplement Mr. Smith's care or living arrangements.


When the Medicaid laws changed on February 8, 2006, not everything that changed was for the worst. In part, the new law, called the Deficit Reduction Act of 2005 or DRA for short, codified the criteria for analyzing the purchase of annuities.

I have written several articles about the use of annuities in Medicaid planning, so I will only briefly describe how a potential Medicaid applicant might use an annuity in the planning process. The most basic use of an annuity involves a married couple.

In Medicaid parlance, the spouse who is receiving care in a nursing home is called the “institutionalized spouse” and the spouse who is living at home is called the “community spouse.” The Medicaid Act pools the assets of a couple, so whatever assets the community spouse holds in her name count against the institutionalized spouse. This prevents a couple from placing all of the assets in to the name of the community spouse and immediately qualifying the institutionalized spouse for benefits.

In order to be eligible for benefits, the institutionalized spouse must have no more than $2,000 in assets. Since assets are pooled, without some provision permitting the community spouse to retain additional assets, this would leave the community spouse with only $2,000 in assets. In order to mitigate this result, the Medicaid Act permits the community spouse to retain a certain amount of assets in her name, currently up to a maximum of $101,640.

Unlike assets, income is not pooled. Income follows the “name on the check” rule. The spouse whose name is on the check is the owner of the income. This means that Social Security income and pension income of one spouse is not imputed to the other spouse.

Given these laws, let's assume the following facts. Mr. Smith is currently residing in a nursing home. Mrs. Smith is currently living at home. Mr. and Mrs. Smith have combined assets of $200,000, comprised of several bank accounts. Mr. Smith receives Social Security and pension income of $2,000 per month. Mrs. Smith receives Social Security income of $500 per month.

The Medicaid Act would permit Mrs. Smith to retain $100,000 of the $200,000 in assets and all of her income. The Act would also permit her to retain a certain amount of Mr. Smith's income in order to meet her monthly expenses. The Medicaid office would tell Mrs. Smith that she must “spend down,” that is, spend, the remaining $100,000 in assets before Mr. Smith would qualify for Medicaid benefits.

One Medicaid planning technique might be for Mrs. Smith to purchase an irrevocable, non-assignable annuity for $100,000. If structured correctly (emphasis on “if”), the annuity could convert the $100,000 in assets to income that belongs solely to Mrs. Smith and does not count against Mr. Smith's eligibility.

What the DRA did was give us a set of criteria that the annuity must meet in order to not be treated as an uncompensated transfer of an asset. Medicaid penalizes an individual when he makes uncompensated transfers of assets. Such transfers occur when a person gives something away and fails to obtain something of equal value in return for the item given away.

The DRA tells us that if the annuity is actuarially sound, immediately payable, not subject to cancellation, and names the state as remainder beneficiary for any benefits paid on behalf of the institutionalized spouse, then the purchase of the annuity is not an uncompensated transfer of an asset. The DRA is the first time that the federal government codified the rules concerning the purchase of an annuity. Before the DRA, whether the purchase of annuity was an uncompensated transfer was left up to the states to interpret.

Recently, a federal district court enjoined the state of Pennsylvania from enforcing a regulation that treated annuities as available assets. This decision is one in what is becoming a long line of federal cases that have similar holdings.

Essentially, what the court said, and with which I am inclined to agree, is that once the assets are converted to income in the community spouse's name, the state can look no further. The community spouse's income is hers to keep, so the state cannot treat that stream of income as an available asset of the community spouse.

I think the purchase of properly structured annuities will become a much larger part of Medicaid planning under the Deficit Reduction Act. For now, I can tell you that you better have a lawyer on retainer if you plan on using an annuity in your plan, because the State is going to fight you to the death on this issue.


In 2001, President Bush and a Republican-controlled Congress enacted a law that greatly reduced and will eventually eliminate the federal estate tax. The catch is, the law sunsets after ten years, meaning that in 2011, the laws governing the federal estate tax will be as those laws existed in 2001.

Since passing the 2001 law, the Republicans attempted on many occasions to pass a bill that would permit the permanent repeal of the estate tax. President Bush indicated that if such a bill made it out of Congress, he would sign the bill into law.

I've written about this topic many times, as have many other commentators. What breaths new life into this subject is the fact that the Democrats now control the Congress, and Democrats have consistently indicated that the estate tax is an excellent way in which the federal government can raise revenue.

You might think that being an elder law attorney - and a part of the general practice of elder law is estate planning - I want the estate tax to remain in existence. After all, if people are fearful that their estates will pay tax when they die, causing their children to receive less of an inheritance, then more people will come to me for estate planning. Well, that's somewhat true.

But the reality is, because New Jersey has an estate tax and because the credit against that tax is relatively low ($675,000 without a plan to increase the credit), I have plenty of clients who need to engage in estate planning whether the federal estate tax exists or not.

So, with that little disclaimer, here are my thoughts on the federal estate tax and my opinion as to its future.

As much as we all don't like it, a government raises money for the services that it provides one way, it levies a tax against its citizens. To some extent, all taxes are arbitrary. For instance, with regard to income tax, we have a graduated system where the more money you make the higher a percentage of your earnings you pay as income tax; however, that percentage caps at a certain amount of earnings and never increases.

To most of us, this system of taxation seems somewhat fair; however, other countries place a much higher emphasis on sales and use taxes. What this shows is, governments can raise money through different forms of taxation and no one method is the correct method.

Frequently, estate tax is thought of as a double taxation. The decedent who dies with the money paid tax when he earned the money and now he (or his estate) is paying again when he passes that property to his relatives.

Firstly, it is not a double taxation because the person and his estate are different entities. The people receiving the inheritance never paid tax on the money. Secondly, there is a trade off for paying the estate tax. In most instances, the inherited property receives a step-up in basis, meaning that the recipients of the property will have a basis in the property equal to its value on the date of the decedent's death. When the heirs sell the property, they won't have to pay capital gains tax.

If you haven't guessed, I think the estate tax is a fair method for the government to raise money. While I think we can all sympathize with the son who is about to inherit $3,000,000 from his father and has to pay $400,000 in tax, the bottom line is, I think there is something to be said for receiving $2,600,000 of someone else's money.

As for the future of the federal estate tax, I think the federal government will freeze the credit against the tax at some place that excludes most Americans from ever having to pay estate tax. Before the 2001 law change, only 2% of all estates paid federal estate tax. With the changes, I'm sure that less than 1% of all estates pay the tax.

The credit is currently scheduled to increase to $3,500,000 in 2009. My guess is, the Democrats will compromise with the Republicans and freeze the credit somewhere around $3,000,000. After that, there will be an automatic indexing of the credit for inflation.