Quarterly Newsletters

December 2010: Disability Planning 101

I read that 55% of people die without a last will and testament. That statistic doesn't surprise me at all. I think Wills are the subject of much procrastination or fear or both.

People say I'll get a Will, then put it off and forget about it. Some people associate a Will and death so closely it's as if they believe that they'll sign their Will on Tuesday and die on Wednesday.

To tell the truth, though, what surprises me even more is that people do not have powers of attorney and living wills. A power of attorney and living will permit someone else to make decisions for you.

Most people fail to understand that no one else can make decisions for them unless they have granted another person authority to make decisions for them. Doctors and hospitals may listen to family members-of course, they may not-but no one is going to listen to another person about financial decisions.

If your spouse became disabled, you, as her husband, would not be able to make financial decisions for her unless your wife had granted you a power of attorney. If there were a dispute concerning your healthcare-for instance, some family members were saying one thing and other family members were saying something else-then doctors may refuse to listen to the family if you have failed to grant someone the authority to make healthcare decisions for you.

I strongly recommend that clients grant someone else the authority to make decisions for them by signing powers of attorney and living wills in favor of a family member. I recommend this even more than I recommend someone have a Will. A Will, I tell my clients, is for someone else, because you are no longer with us. It's an important document, but not nearly as important as a power of attorney and living will.

If you do not have a power of attorney and living will, then there may come a time when you need a guardian. A guardian is a person who is appointed by the court to make decisions for you.

I have filed hundreds of guardianship actions over the course of my career, and I have probably been appointed a hundred times by a court to be involved in guardianship matters in one capacity or another. And I can tell you, based upon my vast experience, that a guardianship is something you should avoid.

While guardianship proceedings are necessary, the proceedings are only necessary, in most instances, because people fail to plan. In order for someone to become your guardian, he will have to outlay about $4,000 to $6,000. A guardianship proceeding involves, at a minimum, two doctors and two lawyers and the court. In the end, you will be responsible to pay these bills, not the person seeking to be appointed your guardian.

Once someone is appointed as your guardian, he still may have to return to court to ask permission to sell your house or engage in other financial transactions or planning. These return trips will cost your estate even more money.

From start to finish, the appointment of a guardian may take three to four months. If your situation requires immediate attention-for instance, if you are in a hospital and require immediate medical attention-then someone may need to be appointed your special medical guardian, then seek appointment as a full guardian. All of this, of course, adds to the expense of the guardianship.

While you may never need a guardian, most people do not, you never know. The need for a guardian does arise with some frequency. It is not a rare event.

My experience with guardianships and with planning for people in need of care tells me that the most important, most fundamental documents a client can have are a living will and a power of attorney.

THE DEATH TAX IS ALIVE

It appears that the federal estate tax is coming back in 2011. For 2010, there was no federal estate tax, and some very wealthy estates enjoyed the benefit of no estate tax. But buckle up, because the estate tax is coming back.

Well … it's not really that ominous. According to very recent reports, the federal estate tax will be back in 2011 but the exemption equivalent against the tax will be $5,000,000. In other words, only if your estate is greater in value than $5,000,000 will your estate pay federal estate tax.

Furthermore, the tax rate will be reduced from 40% to 35%. So, estates greater in value than $5,000,000 will pay estate tax at the rate of 35% on the amount over $5,000,000.

Historically, even when the credit equivalent was much lower than $5,000,000, the federal estate tax affected fewer than 2% of all estates. I think it is safe to say that far fewer than 1% of all estates will be affected by the estate tax in the future.

Moreover, a couple will still be able to shelter twice the credit equivalent, or $10,000,000. Given these facts, I think it is safe to say that the federal estate tax is something that very few people have to worry about in any serious way.

Ironically, in New Jersey, we are subjected to a state estate tax of which few people seem to be aware and that affects a great number of New Jersey residents. The New Jersey estate tax is imposed upon all estates with a value greater than $675,000.

In New Jersey, dying with a $675,000 estate is not that difficult. Many houses in New Jersey cost more than $675,000, so a house and a few cash assets might put an estate over the New Jersey credit limit.

The New Jersey estate tax rate is about 10%, so the bite of the state estate tax isn't the same as the federal estate tax. I think, for this reason, many people do not know about the tax or complaint about it.

As with the federal estate tax, a couple can shelter twice the credit, or $1,350,000.

There is no federal or state estate tax between spouses, so even if a husband were to die and leave $20,000,000 to his wife, there would be no estate tax; however, if the husband dies and leaves his estate directly to his wife, his estate will not utilize any of his credit against estate tax. So, when the wife dies, she will die with only one credit (one federal credit of $5,000,000 and one state credit of $675,000).

A very common method to utilize each spouse's credit against the estate tax is to draft Wills for each spouse that contain trusts for the surviving spouse's benefit. Now, when the husband dies, the amount of the credit ($675,000 for instance) passes into a trust in his will for his wife's benefit. His wife could even be the trustee of the trust.

By doing this, the couple utilizes the husband's credit against estate tax. The wife can enjoy the benefit of the money, but when she dies, the amount in the trust is not included in her estate.

When the wife dies, the assets remaining in the trust and the money that the wife owns in her name pass to the children.

Assuming that the wife's estate is less than $675,000, there will be no estate tax at all. These trusts in the Wills of each spouse are called "testamentary credit shelter trusts." The trusts are "testamentary" trusts because the trusts are in the last will and testament of the decedent. The trusts are "credit shelter trusts" because the trusts are designed to tax advantage of each spouse's credit against estate tax.

For federal estate tax purposes, a couple will be able to shelter $10,000,000 utilizing testamentary credit shelter trusts. In my opinion, the federal estate tax will impact very few estates, so it is practically a non-issue now.

WHAT IS A TRUST

What is a "trust"? Whenever I mention the word "trust" to someone, I can tell that I have added an unwanted level of complexity to the conversation. I think people think trusts are places where you send money to lock it up … like a safe.

In fact, a trust is a legal document, a contract. It is a contract between the parties to the trust: the grantor, the trustee, and the beneficiary.

The "grantor" is the person who establishes the trust. The grantor is the guy who goes to an attorney and asks the attorney to draft the trust document. The grantor is also the guy who puts money into the trust. Placing money into the trust is called funding the trust.

Like a person, a trust can have multiple financial accounts. In fact, a trust, like a person, can have as many financial accounts as it wants. For instance, a trust can have a checking account and a brokerage account. A trust can invest in bonds, stocks, or CDs. A trust is a legal entity, so it can own anything.

In order for a trust to own an asset, the asset must be titled in the name of the trust. For instance, if Joe Smith wanted his house titled into his trust, he would title his house as follows: "Joe Smith, trustee, of the Joe Smith Trust." By doing this, Joe Smith's trust now owns Joe Smith's house. To title bank accounts into the trust, the account would be titled "Joe Smith, Trustee, of the Joe Smith Trust."

The "trustee" is the person who manages the assets that the trust owns and distributes the assets of the trust. For instance, the trustee would decide to buy stocks or bonds or annuities or CDs.

The trustee would also decide when it is appropriate to make distributions of the trust's assets to the beneficiary of the trust. The terms of the trust will dictate when and why the trustee can make distributions.

The trust might say that the trustee can distribute principal and income of the trust to the beneficiary for the beneficiary's health, maintenance, and support at the trustee's sole and absolute discretion. Given this distribution standard, the trustee would decide when the beneficiary needs money for his support and make a distribution to the beneficiary for the beneficiary's support at the trustee's sole discretion.

The "beneficiary" is the person for whom the trust was designed to benefit. So, when the trust says that the trustee can make distributions to the beneficiary for the beneficiary's health, maintenance, and support, the beneficiary is the person who is receiving the assets of the trust for his health, maintenance, and support.

Trusts can be revocable or irrevocable. Revocable means that the terms of the trust can be altered or that the trust can be wholly revoked. An irrevocable trust is a trust the terms of which cannot be altered. So, once a person forms an irrevocable trust, the terms of the trust are set in stone and cannot be altered.

A trust can be a living trust or a testamentary trust. A testamentary trust is a trust in a last will and testament. Since a last will and testament is only effective when the grantor dies, a testamentary trust does not become effective until the grantor dies. A living trust, on the other hand, can be funded when the grantor is alive. So, money can be placed in the living trust when the grantor is alive.

A testamentary trust is revocable when the grantor is alive, because his Will can be revoked when he is alive, and irrevocable when he dies, because once someone dies the terms of their Will cannot be altered.

A living trust may be revocable or irrevocable depending upon the terms of the trust.

Trusts have all different purposes. For instance, a grantor's child may have problems with drugs or alcohol, so the grantor may decide to form a testamentary trust to hold the child's inheritance. Trusts can be very useful documents and should not be feared.

CARING FOR DAD

Elderly individuals frequently need the assistance of family members. There's a saying that I've heard many times, You are once a man but twice a child. What is meant by that saying is that as we age, we frequently need the same types of assistance that we needed when we were children.

Conditions associated with aging-such as dementia-leave individuals unable to care for themselves in the most basic of ways. Elderly individuals frequently require assistance with clothing, bathing, toileting, and walking.

Providing these types of care often falls on family members. While the elderly individual may obtain home health aide services from third-party providers, for instance, as a home health aide agency, such services are rarely sufficient, and family members must fill in the gaps of service. Some elderly individuals do not want "strangers" in their home and refuse third-party services altogether.

When a family member is providing home health services, a question that may arise is, can the family member be compensated for the services she is providing to the family member? For instance, can dad pay his daughter for providing the same types of services that a third-party home health aide would have provided to dad?

Typically, this question arises in the context of the Medicaid program. The family is concerned that someday dad may need to enter a nursing home, and they are concerned about how the Medicaid office will view the payments to the daughter for the care that she has provided to dad.

New Jersey law provides an answer to this question, or so you would think. A New Jersey regulation governing the Medicaid program says that if the daughter entered a written agreement with dad to be compensated for the services that the daughter is providing to dad and the agreement pre-dates the delivery and compensation for those services, then dad can compensated his daughter for the care she is providing to him. Essentially, if dad and daughter sign a written care agreement that provides for reasonable compensation, everything should be fine.

Personally, I think this regulation is both fair and necessary. Without the requirement that the agreement be in writing, you would have people claiming that dad was simply paying them for services provided instead of gifting money to them. It's fair because all the family members need to do is put their agreement in writing before providing the services.

The problem is, in the past year, the Medicaid office has decided to ignore its own regulation, and federal law on the issue, and has promulgated an unwritten policy to ignore care agreements and to treat the compensation paid pursuant to the care agreement as a gift to the family member from the Medicaid applicant. So, if dad paid his daughter $2,000 a month for the past two years for the care that she provided to him, Medicaid will say that dad gifted the daughter $2,000 a month for the past two years and impose a penalty period, or period of ineligibility for Medicaid, for those gifts.

In my practice, I have rarely used care agreements. Because the compensation is taxable income to the daughter, most clients do not wish to use this technique as a means to preserve a portion of dad's estate and compensate the daughter for the care that she is providing to dad; however, many elder law attorneys have used this technique, and they are finding the door shut, without warning, years after the payments began.

In my opinion, the Medicaid office's new policy is yet another example of government by bureaucracy. Individuals who administer a complex program hiding behind the complexity of the law and acting outside of the law. If, for instance, a daughter is providing care to her father, there is nothing inherently wrong with the father compensating the daughter for that care.

WHAT IS A WILL?

When I define a "last will and testament," I say that it is a document that disposes of your property after your death. The typical Will might say something such as "I, Joe Doe, being of sound mind, hereby leave my entire estate to my wife." I think that is how most people think of a Will.

Oddly enough, New Jersey's Probate Code, the series of laws governing the administration of estates, fails to provide a satisfactory definition of a Will. According to the Probate Code, a "Will" means the last will and testament of an individual and includes a document that merely appoints an executor or revokes or revives another will.

I am always skeptical of any definition that defines a word by referring to the word, for instance, a "Will" is the "last will and testament" of an individual. In other words, a Will is a Will.

Perhaps a Will doesn't need a better definition than the Probate Code provides because most people would recognize a document that a person intended to be his Will. Perhaps a Will is such an obvious document that it needs no greater definition than a reference back to itself. If you think that, though, you should probably think again.

Most professionally drafted Wills are self-proving. A self-proving Will simply means that the document is signed by the testator (the individual making the Will), witnessed by two people, and the testator and witnesses signed in the presence of a notary. If a Will is self-proving, then the Will can be admitted to probate without any further proof. In short, the executor can take the original Will to the surrogate along with an original death certificate and have the Will admitted to probate in twenty minutes or less.

A Will does not have to be self-proving. Some Wills, particularly older Wills, are simply witnessed by two people. The signatures are not notarized.

A Will such as this can be admitted to probate if someone attests to the genuineness of the testator's signature and the witnesses' signatures. While admitting such a Will to probate is more difficult than admitting a self-proving Will to probate, admitting such a Will to probate is not that difficult.

New Jersey also permits a holographic Will to be admitted to probate. A holographic Will is a Will the material portions of which are in the testator's handwriting and is signed by the testator. So, if a person sits down and handwrites a Will, then signs the Will, he has made a holographic Will.

Recently, New Jersey's Probate Code has taken the concept of a Will one step further. We now have the concept of a "writing intended to be a Will." A writing that fails to satisfy the holographic Will criteria and fails to satisfy the criteria to be a self-proving Will or a Will that is simply witnessed by two people.

Two cases have held that a writing intended to be a Will need not even be signed. For instance, if a person goes to a lawyer to have a Will drafted but dies before he ever signs the Will, a potential beneficiary may prove that the decedent intended the unsigned writing to be his Will.

In my opinion, the concept of a writing intended to be a Will is a deterioration of the laws governing Wills. Such a concept will inevitably lead to people attempting to get various documents that are not Wills admitted to probate as a writing intended to be a Will.

I have drafted thousands of Wills, and I have never had a client who died between the drafting of the Will and the signing of the Will. If a client is sick, I draft the Will quickly and visit the client to have the Will signed.