Quarterly Newsletters

September 2008: Protecting Your Spouse

Long-term care costs a lot of money. A nursing home in this area can cost upwards of $9,000 a month.

When one spouse requires nursing home care, the other spouse worries about protecting her estate for herself and for her family. If her husband requires long-term care, the wife who remains at home, called the "community spouse," worries that she will have to spend all of her money on her husband's care and will have no money on which to live. She also worries that when she dies Medicaid will place a lien on her estate and will prevent her from passing her estate on to her children.

The fact of the matter is, the laws governing the Medicaid program can be quite generous to a community spouse. Medicaid will permit a community spouse to retain her home and up to $104,400 in assets.

So, for instance, if Mr. and Mrs. Smith own a home worth $500,000 and $220,000 in assets and Mr. Smith enters a nursing home, Medicaid will permit Mrs. Smith to retain the home and to retain $104,400 of the cash assets. This means that Mr. Smith can qualify for

Medicaid despite the fact that his wife retains over $600,000 in assets. In my opinion, those rules are quite generous.

Once Mr. Smith qualifies for Medicaid benefits, Mrs. Smith is free to use that $600,000 of assets for her own health and welfare in any way that she sees fit. She could sell her house and purchase a smaller, less expensive house, increasing the amount of cash that she has.

If Mr. Smith predeceases Mrs. Smith, Medicaid cannot place a lien on Mrs. Smith's estate. So, for instance, if Mr. Smith resides in the nursing home for two years and receives Medicaid benefits the entire time, Medicaid would seek estate recovery from his estate after he dies.

Medicaid might have reimbursed the nursing home in which Mr. Smith resided as much as $6,000 a month. Over the two-year period of time, Medicaid might have paid $150,000 for Mr. Smith's benefit. If Mr. Smith owns any assets at the time of his death, Medicaid would want to recoup some of the money that it expended for Mr. Smith's care from his estate. Of course, a Medicaid recipient rarely has assets remaining in his name at the time of his death, so Medicaid only achieves recovery against a few estates.

But surviving spouse's tend to worry that Medicaid will come after them for the benefits that were paid on behalf of their deceased spouse. The good news is, Medicaid does not seek recovery against a surviving spouse's estate. Medicaid is prohibited from seeking such recovery. Mrs. Smith is free to retain her $600,000 in assets.

If Mrs. Smith predeceases Mr. Smith, the story can be quite different. Typically, Mrs. Smith's last will and testament would name Mr. Smith as her sole beneficiary, meaning that Mr. Smith will receive the entirety of Mrs. Smith's $600,000 estate and will be disqualified from Medicaid benefits. Mr. Smith will now have to use the $600,000 that he received from Mrs. Smith to pay his $9,000 a month nursing home bill, which Medicaid was paying before Mrs. Smith died.

Mrs. Smith might want to disinherit Mr. Smith for this reason, but a spouse cannot disinherit a surviving spouse. A spouse must leave her surviving spouse an amount necessary to satisfy the elective share amount in order to avoid upsetting Mr. Smith's receipt of Medicaid benefits.

For my clients in Mrs. Smith position, I draft a special type of last will and testament that leaves Mr. Smith only enough of Mrs. Smith's estate as is necessary to satisfy the elective share. This minimizes the financial impact of Mrs. Smith's death on Mr. Smith's future Medicaid eligibility.

PROBATE IS EASY

As my elder law practice ages, I find myself handing more and more estates. When you draft hundreds of wills each year, eventually, clients will pass away and family members will turn to you to assist them with handling the estate.

When a family member dies, some people believe that they must hire an attorney. They believe that probate is a difficult process and that only an attorney can guide them through the probate process. These are misconceptions. Many estates are quite simple to administer, and professional help is probably unnecessary.

In my opinion, there is no estate for which any person would need the assistance of an attorney to submit the decedent's last will and testament to probate in New Jersey. That's a fairly bold statement and might take some people by surprise. But if you truly understand the statement, you would probably agree.

When a person dies with a Will, he is said to have died "testate." When someone dies without a Will, he is said to have died "intestate."

Typically, when someone has a Will, he names an executor of his estate in his Will. When the person dies, his executor must qualify as the executor of the decedent's estate. Just because you are named as the executor in the Will, you are not officially the executor of the estate until you are appointed as the executor by the Surrogate of the appropriate county.

For instance, if Mr. Smith dies in Monmouth County naming his son James as the executor of his estate in his Will, James will not officially be the executor of the estate until the Monmouth County Surrogate appoints James as the executor of the estate. Being officially appointed as the executor of the estate is really what submitting a Will to probate is all about.

Once the Will is admitted to probate, the executor named in the Will is officially the executor of the estate and has the authority to act on behalf of the estate.

What tends to happen is, James thinks he has to hire an attorney since he was named as the executor of his father's estate. James then talks to his friend who tells him that probating the Will is simple and that James should go down to the Surrogate's office. James goes to the Surrogate and submits his father's Will to probate in about twenty minutes without breaking a sweat. In fact, the probate clerks at the Surrogates Office walk James through the process, and James barely has to do a thing.

James leaves the Surrogate's Office thinking he was laboring under a complete misconception and that the assistance of an attorney with the administration of his father's estate is wholly unnecessary.

When a client comes to me to assist them with administering an estate of a family member, I tell the client to go submit the Will to probate without me. I tell them that the Surrogate will walk them through the process and that there is no reason for me to attend the meeting with them.

The act of submitting a Will to probate is the equivalent of putting the keys in a car. My four year old son can put the keys in my car. My four year old son cannot drive a car.

Now, don't get me wrong. As I said at the start of this article, I think many estates are quite simple to handle and the assistance of an attorney is unnecessary. On the other hand, there are many estates that are quite difficult to handle.

Typically, the more valuable the estate, the more complicated. For instance, if Mr. Smith's estate is worth $800,000, then his son James will need to file a New Jersey Estate Tax Return. This return is somewhat complicated and James will probably require the assistance of an attorney.

James may wish to account to the beneficiaries of the estate. There is an appropriate format for an accounting. James may wish to have the beneficiaries of the estate sign releases and refunding bonds, agreements through which the beneficiaries of the estate agree that James performed his duties appropriately and agree to refund money to James if necessary to pay expenses of the estate.

What people shouldn't think is, just because you go the Surrogate to admit a Will to probate doesn't mean the hard part of estate administration is over. All submitting a Will to probate means is that the hard part of estate administration has just begun.

PROMISES, PROMISES

When people require long-term care, they frequently look to Medicaid for assistance in paying for that care. Long-term care, such as care in a nursing home, can cost as much as $9,000 a month. Medicaid is the only government program that provides real assistance with the costs of long-term care.

In 2006, Congress enacted the Deficit Reduction Act (or DRA), which modified the laws governing the Medicaid program. Specifically, the DRA modified the Medicaid transfer of asset rules.

Medicaid is a welfare program. In order to qualify for Medicaid, the applicant must have very limited resources. In New Jersey, the applicant must have no more than $2,000 in resources.

If Medicaid failed to punish individuals who gifted resources, people who required long-term care would simply gift all of their assets and qualify for Medicaid the next day. For this reason, Medicaid does punish individuals who transfer resources during a specified period of time.

That period of time is commonly referred to as the lookback period. Prior to 2006, the lookback period was three year. The DRA extended the lookback period from three years to five years.

If an individual makes a gift during the lookback period, he is ineligible for a period of time. The more money that is given away, the longer the period of ineligibility. This period of ineligibility is commonly referred to as a penalty period.

So, for instance, if Mr. Smith gives away $20,000, Medicaid will assess a penalty against Mr. Smith based upon the amount of money that he has given away. The penalty period is calculated by taking the amount of money given away ($20,000) and dividing that gift by a divisor number. The divisor number is based upon the average cost of a nursing home room. Currently, the divisor number is $6,942. So, for Mr. Smith, the penalty period would be 2.8 months ($20,000/$6,942 = 2.8).

Yet, the DRA not only lengthened the lookback period, it also changed the start date of the penalty period. Under prior law, the penalty period for a gift would begin in the month that the applicant made the transfer. So, if Mr. Smith transferred $20,000 in May 2008, he would be ineligible for Medicaid benefits for 2.8 months beginning in May 2008.

Under the law as modified, the penalty will not begin until the applicant is otherwise eligible for Medicaid benefits but for the uncompensated transfer. This means that the 2.8 month penalty will not begin until Mr. Smith has less than $2,000 in resources. So, if Mr. Smith transfers $20,000 in May 2008 but does not have less than $2,000 until May 2010 only in May 2010 will the 2.8 month penalty begin.

One planning technique that I have used with considerable success since the DRA became law has involved the use of a promissory note. In a nutshell, what I suggest to the client is that the client gift a portion of his assets and transfer another portion of his assets in exchange for a promissory note that pays the Medicaid applicant principal and interest.

The reason for the promissory note is to reduce the resources remaining in the applicant's name to less than $2,000 without gifting all of the assets. The DRA specifically addresses promissory notes and details what the promissory note must contain in order for the note to be a transfer for value, that is, not a gift.

One county in New Jersey is attempting to attack the use of promissory notes. According to the county counsel in this county, if the note is a transfer for value, then the note is a resource that should count against the $2,000 resource limit and if the note has no value because the note cannot be sold to a third-party, then the transfer is a gift.

This argument ignores the law. The law is, if the promissory note meets certain requirements, then the note is not a transfer of an asset. That's the law. The fact that there is no market to purchase these notes simply means that the note is not a resource. The note does have value because it pays Mr. Smith principal and interest.

I appreciate that the State wants to save money by attacking Medicaid planning. What I do not appreciate is some of the frivolous arguments that are made in the pursuit of that goal.

VALUING AN ESTATE

As my elder law practice ages, I find that a larger percentage of my practice involves the administration of estates. When a person dies, there are certain tasks that need to be performed. Because an executor has the highest duty of care with regard to the estate's assets, it is important that the executor handle those assets with great care.

The decedent's last will and testament must be submitted to probate before the Surrogate of the county in which the decedent died domiciled, if the decedent owned any "probate property." Probate property is property that does not have a beneficiary designation and is not owned by another person as joint tenant. So, for instance, if someone dies with a bank account in his name alone that does not have a transfer on death designation, that person's Will would have to be submitted to probate.

After the decedent's Will is submitted to probate, the duly appointed executor of the decedent's estate must gather his assets. In other words, the executor will close the decedent's accounts and open a new account or accounts in the name of the estate.

The executor must notify the beneficiaries of the estate of the fact that the Will has been admitted to probate.

The executor must then pay all of the debts of the estate, including any estate taxes that may be owed. Finally, the executor must account to the beneficiaries of the estate, providing the beneficiaries with the value of the assets that came into the executor's hands as of the death of the decedent, an itemization of the income that the estate's assets have earned, a list of the debts that the executor has paid, and a statement of the assets that remain in the estate ready for distribution to the beneficiaries.

Because the value of the decedent's assets as of the moment of his death is an important piece of information both for estate tax purposes and for purposes of the accounting, one of the first tasks that I perform for a client who is the executor of an estate is ascertain the value of the decedent's assets as of the date of his death. I send "date of death" letters to all of the financial institutions at which the decedent had accounts.

I also request that the executor obtain an appraisal of any real estate that the decedent owned. If the real estate is of modest value, I frequently will instruct the executor that she can obtain an opinion letter from a realtor as to the value of the house. If the house is more unique or more expensive, I would suggest that the executor retain the services of a licensed appraiser.

When the financial institutions respond to me with accurate date of death values for the decedent's accounts, I enter this information into an estate tax return. I also use the real estate appraisal to value the real estate, unless the real estate sells before the return is due.

The problem is, estate tax returns are due within eight to nine months of the decedent's death, and frequently, the house does not sell before the return is due. The problem them comes when the house sells several months after the return is due for less than the appraised amount.

For instance, assume that the house appraises for $450,000 six months after the decedent's death but sells for $400,000 fifteen months after the decedent's death. That is an 11% price differential. Let's further assume that housing prices in the area in which the house is located only dipped 3% in the same period of time. Clearly, the appraisal, which was only an educated guess, was inaccurate.

Technically, no revised estate tax return would be due because the appraisal was performed in good faith and the price differential could be the result of market forces, a declining real estate market, not inaccuracy. The problem I see is, if the executor fails to file a revised return, the estate will pay more estate tax than if a revised return were filed.

While that loss might be able to be passed out of the estate to the beneficiaries, who could then claim the loss on their personal income tax returns, the problem with that is, if one of the beneficiaries sues the executor claiming that the executor caused the loss due his dilatory actions in marketing the house. In other words, the executor took too long to get the house on the market and as a result of that delay, the estate lost $50,000.

Of course, the estate probably did not lose $50,000, the appraisal was probably just inaccurate. So, for this reason, because I worry about the executor being sued for a phantom lose, I file a revised estate tax return to eliminate that phantom lose.

TO PLAN OR NOT TO PLAN

I frequently tell clients that a last will and testament is an important document because it makes the administration of their estate more manageable and much more cost-efficient for their family. But a power of attorney, I tell my clients, makes the administration of their life much more manageable and much more cost-efficient in the event that they are incapable of making decisions for themselves. In short, a Will is for someone else, a power of attorney is for you.

When an individual attains the age of eighteen, no one, not their spouse, not their children, can make decisions for them. If a person is incapable of making decisions for himself and if he has failed to execute a power of attorney, then a guardian would need to be appointed to make decisions for him.

A guardianship is a court procedure through which one person, named the guardian, is appointed by a court to make decisions for another person, called a ward. A guardianship is typically necessitated when a person fails to plan for his future incapacity by signing a power of attorney.

A guardianship is an involuntary procedure. It is involuntary because the prospective guardian files the action to be appointed the guardian of the ward. The ward is not bringing the action.

A guardian is only appointed if the Court finds that the ward is mentally incapacitated. The term "mental incapacity" is defined as the inability to handle one's affairs as the result of mental or physical infirmity or illness.

Because both mental and physical infirmity can result in "mental incapacity," it is possible that a guardian could be appointed for an individual who retains his full mental faculties. In practice, however, most wards are truly mentally incapacitated, suffering from dementia or some other mental infirmity.

A power of attorney is a document that permits one person, called the attorney-in-fact or agent, to make decision for another person, called the principal. Unlike a guardianship, a power of attorney is a voluntary procedure; in other words, the principal voluntarily signs the power of attorney appointing the agent to make decisions for him.

A power of attorney is far superior to a guardianship in almost every manner.

Cost. A power of attorney costs anywhere from $10 to $200. You can buy a $10 power of attorney at an office supply superstore. Undoubtedly, it will be a very basic document that will fail to address many common elder law issues, such as, gifting of assets, compensation of the attorney-in-fact, and the obligation of the attorney-in-fact to account to family members. The $200 power of attorney will be a very well drafted document that will address most, if not all, of the issues that your attorney-in-fact may face.

A guardianship costs anywhere from $4,500 to $6,000, assuming that no one objects to the prospective guardian serving the ward. A contested guardianship, a guardianship where someone objects to the guardian serving, can cost tens of thousands of dollars.

Comprehensiveness. A well-drafted power of attorney will permit the attorney-in-fact to perform any action that needs to be performed for the benefit of the principal. For instance, a well-drafted power of attorney will permit the attorney-in-fact to access bank accounts, brokerage accounts, life insurance policies, individual retirement accounts. A well-drafted power of attorney will permit the attorney-in-fact to hire attorneys for the principal, to enter contracts on behalf of the principal, and even to create trusts for the principal's benefit.

A guardianship permits the guardian to make residential, healthcare, and financial decisions for the ward; however, unlike a power of attorney, many decisions require additional court approval. For instance, the guardian cannot sell the ward's house without court approval.

Transferability. Finally, a power of attorney is transferable from state-to-state. While it may be advisable to sign a power of attorney in every state in which you live, executing one in every state is not mandatory. On the other hand, a guardianship is only valid in the one state in which it was granted.