Quarterly Newsletters

March 2013: The Devil is in the Details

The Superior Court of New Jersey, Appellate Division, recently decided a case that almost seems comical, but the parties in the case probably aren't laughing.

Jack Murray engaged the services of William E. Spiegle III, Esq., to draft his last will and testament. Mr. Murray left the entirety of his estate to family members or to trusts for the benefit of family members.

Two months after signing his last will and testament, Mr. Murray went to a bank in Florida. He asked the bank representative to name a trust as the beneficiary of one of his bank accounts. The bank representative dissuaded Mr. Murray from naming the trust as the beneficiary of the bank account because Mr. Murray did not have a copy of the trust document with him. Instead, Mr. Murray named "William Spiegle Atty" as the designated beneficiary of the bank account.

At the time of Mr. Murray's death, the Florida bank account held approximately $143,000, which was roughly one-third the value of Mr. Murray's entire estate.

Mr. Spiegel wrote a letter to the executor of Mr. Murray's estate essentially saying that he had no idea why Mr. Murray had named him as the designated beneficiary of the account, but he could only conclude that Mr. Murray wanted him to have the money. Mr. Murray and Mr. Spiegel did not have a relationship outside their attorney-client relationship, and they had not communicated with one another between the time Mr. Murray signed his last will and testament and when he opened the bank account naming Mr. Spiegel as the designated beneficiary.

In this case, Mr. Spiegel did not draft a Will that named him as a beneficiary. Instead, for some reason, Mr. Murray asked his bank to name Mr. Spiegel as the beneficiary of a bank account that he owned. That reason seems rather plain to me, and it seemed rather plain to the trial court and appellate division.

The bank representative dissuaded Mr. Murray from naming a trust as the beneficiary of the account because Mr. Murray did not have the trust document with him. So, Mr. Murray did the next best thing in his mind--he named Mr. Spiegel, in his capacity as an attorney, as the beneficiary of the account. My guess is, Mr. Murray thought that by doing this the money would find its way into the trusts that Mr. Spiegel had drafted for Mr. Murray.

There is no question that Mr. Murray was mistaken in this belief and that his intentions became muddled by his actions. The thing with death wishes--such as those found in a Will or carried out through a beneficiary designation--is that the person making the wish is dead. Mr. Murray isn't around any longer to tell us what he was thinking. But I think it is rather clear, and two courts thought it rather clear, that Mr. Murray did not want to leave a third of his estate to the attorney who drafted his Will.

The court rescinded the beneficiary designation, permitting the money to pass through Mr. Murray's Will to his family. I wonder how much the estate spent in legal fees to obtain this result. When making an estate plan, you need to think carefully about the words you use, because you won't be around to fill in the gaps of your plan. What seems clear to you may not be as clear to others.


So the fiscal cliff has been averted. If for no other reason, I'm happy it's been resolved so I can stop hearing about the fiscal cliff. But what do the changes to our tax laws mean to you and me with respect to estate and gift tax?

A few weeks ago, I predicted that Congress would resolve the estate tax aspect of the fiscal cliff by retaining the current exemption equivalent against the estate tax, that is, $5,000,000. Though it doesn't happen all the time, this time, my prediction was correct.

Congress retained the $5,000,000 exemption equivalent against the federal estate tax. Since the exemption equivalent is indexed for inflation, the current exemption equivalent is $5,250,000.

What this means is, an individual would have to die with more than $5,250,000 before his estate will pay federal estate tax. Since most people don't have $5,250,000, the federal estate tax is a complete non-issue for the vast majority of Americans. In fact, there are so few estates that paid estate tax last year that the only thing that amazes me about the federal estate tax is the number of people who worry about it.

A married couple can shelter $10,500,000 from estate tax. The federal law makes it easier for a married couple to use both spouses' exemption equivalent, a concept called "portability." The second-to-die spouse can claim the unused portion of the first-to-die spouse's exemption equivalent, but in order to make the claim, the second-to-die spouse must file a federal estate tax return upon the death of the first spouse. (I said "easier," not easy. Legal work would still be necessary.)

Congress did raise the estate tax rate from 35% to 40%; however, since most of our estates will never come close to paying estate tax, the rate of the tax is hardly a concern.

Notice that I say most of our estates will never pay federal estate tax. Since the individual exemption equivalent is $5,250,000 and the exemption equivalent for a married couple is $10,500,000, I think we can all agree that my statement is accurate, but I want you to take notice of the limitation of the statement.

While most of our estates will not have to pay federal estate tax, a great many of my clients are affected, and will continue to be affected, by the New Jersey estate tax. In 2001, the federal government began to increase sharply the exemption equivalent against federal estate, raising it from $675,000 to its current lofty height of $5,250,000.

When the federal government made this change to the law, the state of New Jersey reacted by freezing the credit against New Jersey estate tax at $675,000. So, in New Jersey, if your estate exceeds $675,000, your estate is affected by New Jersey estate tax. Also, unlike the federal law, the state law does not contain a portability feature.

From a practical standpoint, what this means is that many married couples will continue to need credit shelter trust planning. Simply stated, a credit shelter trust is a trust that is typically contained in the last wills and testaments of a married couple. The trusts permit the couple to take advantage of each spouse's $675,000 credit against New Jersey estate tax. By using credit shelter trusts, a married couple can shelter $1,350,000 from New Jersey estate tax, which is $675,000 times two.

The federal government also retained the $5,000,000 lifetime credit against gift tax. Since this credit is also indexed for inflation, an individual can make lifetime gifts up to $5,250,000 without paying federal gift tax. (The state of New Jersey does not impose a gift tax.)

The annual exclusion amount, which is also indexed for inflation, increased from $13,000 to $14,000. Taken together, the lifetime gift credit and the annual exclusion credit means that an individual can gift $14,000 each and every year to an unlimited number of people without reducing his $5,250,000 lifetime credit and because of his lifetime credit, he can gift an additional $5,250,000 without ever having to worry about gift tax.

So, do most of us have to worry about federal estate tax or gift tax? No. You are now free to worry about something else.


Last week, a federal district court in Oklahoma decided a case that I found very interesting. For several years, I litigated a case in federal court involving the use of promissory notes as a Medicaid planning technique. Ultimately, I did not prevail in my case. I can't say that I lost, because my case was never resolved one way or the other after a trial, but I certainly didn't prevail either.

Medicaid is a federal and state cooperative health insurance program for needy individuals. In order to qualify for Medicaid, an individual must have insufficient income with which to pay for his care and he must have a very limited amount of assets. Unlike most health insurance programs, Medicaid will pay for long-term care costs, such as care in a nursing home or assisted living residence.

Many people consult with me in order to qualify themselves or a family member for Medicaid sooner than the individual would qualify for Medicaid without planning. This type of service is known as Medicaid planning. Through Medicaid planning, a lawyer is assisting an individual with preserving a portion of his estate for himself or his family by qualifying him for Medicaid benefits sooner than he would qualify without planning.

Since long-term care can cost anywhere from $5,000 to $12,000 a month, many individuals who never thought they would need to qualify for Medicaid find themselves eager to qualify. Most of my Medicaid-planning clients are people who worked their entire lives, lived frugal lives, and never thought they would need Medicaid benefits. Of course, they never counted on spending $12,000 a month for a nursing home.

In 2006, the federal government changed the laws governing the Medicaid program. Part of those changes involved promissory notes. A promissory note is simply an I-owe-you, a document through which one person, the borrower, promise to pay to another individual, the lender, a certain sum of money. For instance, "Mom, I owe you $50,000" is a promissory note.

Before the federal government changed the Medicaid Act, I had never used promissory notes as a Medicaid planning technique. After the federal government changed the Medicaid program, I began to use promissory notes extensively as a Medicaid planning technique.

In short, and without confusing you too much, this is how I used promissory notes: Mrs. Smith is in a nursing home costing her $10,000 a month. Mrs. Smith has total assets of $100,000, consisting of a checking account. She has monthly income of $3,000 a month, consisting of Social Security and a pension. Her monthly deficit is, therefore, $7,000 ($10,000 - $3,000 = $7,000). Mrs. Smith has one son, Joe Smith.

Mrs. Smith gifts $50,000 to her son, Joe. Mrs. Smith lends Joe $50,000. Joe agrees to pay Mrs. Smith the $50,000 back over a period of seven months at the rate of approximately $7,000 a month.

The gift of $50,000 causes Mrs. Smith to be ineligible for Medicaid benefits for a period of seven months. During that seven-month period of time, Mrs. Smith uses her income ($3,000) and the $7,000 monthly payment from the promissory note to pay her $10,000 a month nursing home bill. At the end of the seven-month period, Mrs. Smith is eligible for Medicaid benefits and Joe Smith retains the $50,000 that was gifted to him. Joe can now use the $50,000 to supplement Mrs. Smith's care.

Now, there is a good deal of federal court case law that says planning is not illegal and is, in fact, something that many people engage in doing. For instance, few people in this country would begrudge someone who plans to pay less in income tax. Similarly, courts do not look down on people simply because they plan to qualify for Medicaid benefits. Or, at least, courts shouldn't.

In my case, I initially received a good decision from three federal judges sitting on a federal appeals court panel, which supported my position. Later, that same court, with three different judges, rendered a decision that contradicted the court's first decision. If that's confusing to you, you're not alone because it was/is confusing to me.

But a recent decision of a federal district court in Oklahoma supports the use of promissory notes as a Medicaid planning technique. Looking at the law, not at the goodness or badness of Medicaid planning, the court held that the promissory note was valid, meaning that the technique discussed above would work. A colleague of mine is currently litigating a promissory note case in federal court in New Jersey. Time will tell if the Oklahoma case will have any power to persuade a New Jersey federal judge.


A recent decision of the Superior Court of New Jersey, Appellate Division, was the source of an interesting discussion among elder law attorneys. The case is entitled Matter of Rizzo.

Essentially, the facts of the case are these: The Bergen County Board of Social Services filed an action in the Superior Court of New Jersey to have Fred Rizzo declared to be an incapacitated individual. Bergen County wanted the Office of the Public Guardian--a government office that will serve as an individual's guardian under certain circumstances-appointed as Fred Rizzo's guardian.

Fred Rizzo had a son, Douglas Rizzo. Fred Rizzo had signed a power of attorney document in favor of his son, Douglas, so Douglas had the ability to make financial decisions for Fred. Fred Rizzo, Douglas Rizzo, and Douglas Rizzo's family all resided together in Fred Rizzo's house. The house was Fred Rizzo's only asset.

After Bergen County filed the guardianship action, the court appointed a private attorney to serve as Fred Rizzo's counsel in the guardianship proceeding. The appointment of court-appointed counsel for an alleged incapacitated individual in a guardianship proceeding is standard operating procedure. Typically, court-appointed counsel is paid from the assets of the incapacitated person, but a court rule permits the court to order the payment of court-appointed counsel's fees as it deems appropriate. Obviously, this is a vague rule, as it permits a court to order anyone to pay the fees of the court-appointed counsel.

In the Rizzo guardianship, the court specifically found that Douglas Rizzo had not done anything wrong while acting as his father's power of attorney agent, and ultimately, the court named Douglas Rizzo, not the Office of the Public Guardian, as Fred Rizzo's guardian.

The court ordered that Fred Rizzo was responsible to pay the fees of his court-appointed counsel; however, the order also provided that if Fred Rizzo's estate were insufficient to pay the fees of his court-appointed attorney, then Douglas Rizzo would be responsible for the fees of Fred Rizzo's court-appointed counsel.

Now, this case was the point of discussion among elder law attorneys for several reasons. First of all, why did the Bergen County Board of Social Services file to have the Office of the Public Guardian appointed as Fred Rizzo's guardian when Fred Rizzo had, at least, one son, Douglas, and Fred Rizzo had named his son Douglas as his power of attorney agent? Typically, the Office of the Public Guardian will not serve as an individual's guardian when the individual has family members who are ready, willing, and able to serve.

In addition, when someone has a power of attorney, they typically do not need a guardian. Since Fred Rizzo had executed a power of attorney document naming his son, Douglas, as his power of attorney agent, why was a guardianship action even required? The court specifically found that Douglas had acted properly as Fred Rizzo's power of attorney agent, so wasn't the filing of the guardianship action by the county unnecessary? Given this fact, why weren't the fees awarded against the county, which appears to have overreacted and caused the Rizzo family money and angst by filing the guardianship action in the first place?

Secondly, since Douglas did not file the guardianship action, since Douglas did not act improperly towards his father, and since Douglas had a power of attorney that permitted him to make decisions for his father, why were the court-appointed attorney's fees awarded against him? Think about this: a government agency files a guardianship action against your father; in the end, the government "loses" its fight to have another government agency appointed as your father's guardian, and you are required to pay legal fees. Something doesn't seem right about that.

What I think happened in this case, putting aside the appropriateness of filing the guardianship action, is that Douglas Rizzo was Fred Rizzo's only child and Douglas was going to inherit Fred's house, which was Fred's only asset, so the court figured that either Fred or Douglas should pay Fred's legal bills. The court-appointed lawyer did work for Fred in the case, whether the case should have been filed or not. But this case does highlight the potential for overreach by the government and it's something that happens every day in some counties.


If you are a veteran who served during war time, or the surviving spouse of such a deceased veteran, you may be entitled to a veteran's benefit commonly known as aid and attendance. Aid and attendance is a cash-assistance benefit designed to help the veteran or his spouse pay for long-term care. Under the aid and attendance program, the veteran can receive up to $2,054 monthly; his spouse can receive up to $1,113 monthly.

For obvious reasons, this benefit appeals to many people. For instance, if you are living at home but require the assistance of a home health aide, an extra $2,000 can go a long way. A live-in aide might cost you $5,500 a month so effectively cutting that amount down to $3,500 a month can permit you to stretch your savings out and stay at home longer.

Similarly, a veteran living in an assisted living residence can also receive aid and attendance. If the assisted living residence costs $6,500 a month, receiving the extra $2,000 can be very helpful.

The issue that I wanted to point out with aid and attendance is the programs effect on the Medicaid program. Medicaid is a federal and state cooperative health insurance program for needy individuals. Unlike most health insurance programs, Medicaid will pay for long-term care in the home (such as a home health aide), in an assisted living residence, or in a nursing home.

There are actually many different programs of Medicaid in the state of New Jersey. For long-term care services (known as "institutional Medicaid") there are two programs of Medicaid: Medicaid Only Medicaid and Medically Needy Medicaid. Medicaid Only Medicaid will pay for care at home, in an assisted living residence, or in a nursing home. Medically Needy Medicaid will only pay for care in a nursing home.

The primary defining factor between the two programs is the applicant's income level. If the applicant's gross monthly income is less than $2,130, he can qualify for Medicaid Only. If his income is one penny above $2,130 on a gross, monthly basis, he can only qualify for Medically Needy Medicaid.

So, if the applicant's income were, for instance, $2,500 a month, he would only qualify for Medicaid in a nursing home, even if he were residing at home or in an assisted living residence. He would have to move to a nursing home if he wanted to qualify for Medicaid. And, if he can no longer afford to pay for his care at home or in the assisted living residence because he has depleted all of his assets, then he has to move to the nursing home.

Effectively being forced to move to a nursing home is not a good thing, particularly when you want to stay at home or in the assisted living residence where, perhaps, you have lived for the past several years. But situations such as this actually do occur, every day.

Assume the following facts: Mr. Smith has been residing in an assisted living residence for three years. He enjoys the assisted living residence and has established many, friendly relationships. When he first entered the facility, he had a decent amount of savings. His Social Security income is $2,000 a month and he applied for and received aid and attendance from the Veterans Administration of $2,054 a monthly. With the $4,000 a month he has been receiving, he has been able to stretch his savings out for the past three years. The facility he resides in currently costs him $7,500 a month.

Now that his savings are depleted, he has to apply for Medicaid benefits. Mr. Smith's aid and attendance is actually composed of two parts-a pension and aid and attendance. Medicaid treats the pension portion as income but disregards the aid and attendance for purposes of the $2,130 a month income cap.

The problem is, if the pension portion of Mr. Smith's aid and attendance places him over the income cap for Medicaid eligibility when added to his Social Security income, Mr. Smith won't be able to qualify for Medicaid. What seems like a boon could become a bane for Mr. Smith.