In my practice, I draft a lot of trusts.  There are various reasons why a trust may be the appropriate solution for a client.

At its core, a trust is a fiduciary relationship.  A trust is created when one person of entity, such as a bank, is holding property for another individual or entity.  The person holding the property is called the “trustee.”  The person for whom the property is being held is called the “beneficiary.”

The written document that many people would call the trust is actually the trust agreement.  The trust agreement is the contractual document that establishes the terms of the trust.  The trust agreement might say something such as “My trustee shall hold and administer the assets and income of the trust for the health, maintenance, and support of my son, the beneficiary of this trust.”  The agreement tells the trustee what to do with the assets of the trust, that is, hold the assets for the son’s health, maintenance, and support.

The person who has the trust agreement drafted and who places the assets in the trust is called the “grantor” or “settlor.”  The grantor typically goes to an attorney and hires the attorney to draft the trust agreement, then the grantor places his assets in the trust for the trustee to hold for the benefit of the beneficiary.

There are many reasons why a grantor might establish a trust.  For instance, the grantor may be a father who has a son who has issues with drugs or alcohol, or the grantor might have a son who cannot effectively manage money, or the grantor might have a son who is disabled.  For any one of these reasons, the grantor might want to establish a trust.

Let’s assume that Mr. Smith has a disabled son, aged 30.  Mr. Smith wants to establish a special needs trust for his son.  The son receives government entitlement benefits, such as Medicaid, so it is important that Mr. Smith choose a trustee who knows the Medicaid program and how the trust might affect the son’s eligibility for Medicaid.  The proper administration of such a trust is important, because an incorrect distribution from the trust could negatively impact the son’s entitlement to Medicaid benefits.

The father/grantor might want to choose a professional trustee, such as a bank, to administer the trust.  Since the son is receiving Medicaid benefits and since the son might live for decades after the father’s death, Mr. Smith wants a trustee who understands the Medicaid program and who will be around for a long time after he dies.  A bank is the logical solution for both of these issues.

Banks typically have trust departments.  Many of these trust departments are very familiar with administering trusts and administering trusts in a manner that does not negatively impact government entitlement benefits.  Moreover, a bank is an entity, not an individual, so a bank does not die.  A bank can “live” for hundreds of years.

A problem that might arise in choosing a professional trustee, or any trustee for that matter, is that there may come a point in time when it would be good to remove the trustee.  Perhaps the trustee and the beneficiary aren’t getting along.  Perhaps a better trustee comes into being, such as a new organization that administers trusts.

A trust protector is a person or entity who is given the authority to remove a trustee and replace the trustee with another trustee.  Typically, the trust protector cannot choose himself to be the trustee or someone who is related to him.

By naming a trust protector, the grantor can build in protection for the beneficiary in the event that a trustee needs to be replaced for any reason that the trust protector deems appropriate.  Knowing that he/they can be removed, also tends to keep the trustee on their toes.

For some people, privacy is important.  They don’t want others knowing about their personal affairs or their financial affairs.

In my practice, I deal with clients’ estate planning needs.  Many issues affecting estate planning involve addressing events that will happen after the client dies.  Some people cherish the idea of privacy even after their passing.

Most estate plans aren’t surprising.  For instance, if Mr. Smith has four children, his last will and testament probably says “I devise my entire estate to my four children, to be divided equally between them.”  There is little surprising in this type of Will.

In some instances, though, Mr. Smith may not leave his estate to his children equally.  Or, Mr. Smith might have a child who has an issue—such as, problems with drugs or alcohol or a disability—and he might not want the world to know about his child’s issue or how he decided to address that issue.  Even if none of his family members have an issue, Mr. Smith may not want the world to know the manner in which he left his estate.

For Mr. Smith, maintaining his privacy—even after his death—is important and it may even have a beneficial effect for his surviving family members.  For instance, it may be best that the world not know his son has a problem with drugs.

If Mr. Smith addresses his son’s drug problem in his Will, his son’s drug problem will become a public record when Mr. Smith’s last will and testament is admitted to probate.  A Will is admitted to probate with the surrogate of the county in which Mr. Smith died a resident.

Once a Will is “probated,” it becomes a public record. Any member of the public can go to the surrogate’s office and look at a copy of Mr. Smith’s Will.

In order to avoid Mr. Smith’s affairs from becoming a public record, Mr. Smith might consider using a revocable living trust as a Will-substitute. A “trust” is a fiduciary relationship, meaning that it is a relationship in which one person, called a trustee, is holding property for another person, called a beneficiary.  Whenever one person is holding property for another person, a trust exists.

In New Jersey, a trust must be in writing to be valid, so there must be a written trust agreement. The trust agreement is the legal document that states the terms by which the trustee holds the property for the beneficiary.

A “revocable” trust is a trust that you can change anytime you want. You can either modify the terms of the trust or revoke the trust in its entirety.

A revocable living trust is typically used as a Will-substitute. A Will passes a decedent’s property to others after he dies.  A revocable living trust typically does the same thing, so for this reason, such a trust is often called a Will-substitute.

The benefit of a trust over a Will is that a trust does not have to be probated. Since the trust does not have to be probated, the terms of the trust never become public.  Since the terms of the trust never become public, the public cannot see the issues the trust addresses.

Going back to Mr. Smith, through a trust, Mr. Smith could address his son’s drug issues by stating that any inheritance passing to his son must be held in trust and that the son must undergo periodic drug testing in order to receive distributions from the trust. Leaving the son the money in this manner protects the son because he doesn’t have wholesale access to the money and because the son’s issues with drugs aren’t made public.

Of course, anyone might appreciate privacy, whether a family member has an actual issue or not. Privacy is a personal desire, but the point is, a revocable living trust permits you to retain your privacy even after your death.

Recently, companies have emerged with the purpose of assisting people (“customers”) qualify for Medicaid benefits, typically when the customer resides in a nursing home or assisted living residence.  The companies are commonly known as non-attorney Medicaid advisors (“advisor”).

If the resident of a nursing home qualifies for Medicaid benefits, Medicaid will pay for most of the costs associated with the nursing home. Since a nursing home can cost upwards of $12,000 per month, qualifying for Medicaid benefits is a big deal.

Nursing homes often refer residents to these advisors. I have seen instances in which the referral was very aggressive, for instance, the family was told that they “must use” the advisor to which the nursing home referred them.

Unlike a lawyer who is responsible to maintain client confidentiality and advocate only for the client, a non-attorney advisor is not bound by a code of ethics. Moreover, the advisor is eager to share the status of his customer’s Medicaid application with the nursing home.  In some cases, the advisor provides written monthly reports to the nursing home as to the status of his customers’ Medicaid application, sharing confidential information with the nursing home.

The Medicaid program is governed by a vast array of extremely complex laws.  The Supreme Court of New Jersey has issued an opinion in which it stated that providing advice on strategies to qualify for Medicaid is legal advice.  When a non-attorney provides such advice, he is committing a fourth-degree crime, the unauthorized practice of law.

Lawyers must go to law school and pass a bar exam for the state in which they practice.  Lawyers are governed by rules, for instance, a lawyer cannot share a client’s confidential information with another person and the lawyer must advocate for the concerns of the client.  Practicing law without a license is a criminal act.  Providing advice to nursing home residents—or their family members—as to qualifying for Medicaid benefits is the practice of law.

The federal regulations governing the Medicaid program do permit a non-attorney to assist an applicant for Medicaid benefits in applying; however, the non-attorney cannot provide any advice on how to qualify for benefits.  In other words, a non-attorney could help you complete the application and gather information for the application, such as bank statements, but the second the non-attorney provides any advice as to how to qualify for benefits—for instance, you should purchase a prepaid funeral for your wife or transfer the house to your name alone to avoid estate recovery—the non-attorney advisor is providing legal advice and committing a crime.

I have had several of my former clients come to me and tell me that a non-attorney Medicaid advisor provided legal advice to them.  A client told me that a company she hired advised her to transfer her assets to a trust for her disabled son.  Advising an applicant for Medicaid benefits on such a complex transfer is clearly the practice of law, and when a non-attorney Medicaid advisor provides that advice to a third-party, he is engaging in the unauthorized practice of law, a criminal act.

Ironically, some of these companies have the word “planning” right in the name of their company.  To me, that is deceptive since the company is touting itself as, primarily, a company that assists people with Medicaid application and the company would be committing a criminal act if it provided any planning advice to its customers.  I would think people hiring a company with the word “planning” in its name would think they were hiring the company to help them plan for Medicaid eligibility.

These companies typically charge around $6,500 to assist a client.  As an attorney, I charge less than $5,000.  And not only do I assist the client will applying for Medicaid, I often develop strategies that save the client’s family tens of thousands, even hundreds of thousands, of dollars. I can develop such a plan because I am a lawyer, and I am legally permitted to practice law.  Don’t get less for paying more.

Hire a certified elder law attorney, not someone who cannot legally providing planning advice yet has the word “planning” right in his company’s name. Hire an advocate who must keep your information confidential and your interests at the forefront, not a company that is eager to share your information with its referral source.

A large percentage of people do not have a last will and testament. If you are included in that group, you should get a Will.  Of those who do have Wills, many put their Will in a secure location and never review it again.  If you are in the latter camp, you might want to take your Will out and give it a quick review.  Recent changes to tax laws may make your current Will outdated.

Until this year, an estate with a gross value greater than $675,000 was subject to New Jersey estate tax. With recent changes in the tax laws, your estate now has to exceed $2,000,000 to be subject to New Jersey estate tax.  In 2018, the New Jersey estate tax is completely repealed, so New Jersey will no longer impose an estate tax.

With the repeal of the New Jersey estate tax, the general revenue fund of New Jersey lost about $400,000,000 annually. It is unknown from where New Jersey will make up these lost funds.  Perhaps, the State will substantially cut programs in order to make up for the deficit.

Because the repeal of the New Jersey estate tax causes such a large deficit in the State’s budget, some people believe that New Jersey might re-instate the estate tax. Perhaps, New Jersey will freeze the credit equivalent at $2,000,000 instead of repealing the tax.

Given this concern, how do you plan for these changing times? Furthermore, if your estate plan was designed to shelter your estate from New Jersey estate tax as that tax existed in the past, should you review your estate plan to ensure that it conforms to the current law?

In general, you should review your estate plan to ensure that it conforms to existing law every ten years. Specifically, if your prior estate plan was designed to assist with estate taxes (either state or federal) and you haven’t reviewed your plan in the last year, I’d review it now.

Many married couples have estate plans designed specifically to address the federal estate tax or the New Jersey estate tax as those laws existed in the past. Now, with the changes to the laws, these older plans need to be modified.

If your estate is under $2,000,000, then you probably don’t have to worry about estate tax. So, if your Wills were designed to address estate tax and your estate is worth less than $2,000,000, then you might want to think about removing any old tax planning provisions that you currently have in your Will.

If you are a married couple and your combined estate is $2,000,000 or more, then you might want to think about having a disclaimer credit shelter trust in your Wills. A credit shelter trust is a trust that is designed to take advantage of the husband’s $2,000,000 credit against New Jersey estate tax and the wife’s $2,000,000 credit against the New Jersey estate tax.  Properly implemented, a credit shelter trust could permit a married couple to shelter $4,000,000 from the New Jersey estate tax.

A disclaimer credit shelter trust would read as follows: “I give my estate to my spouse; however, if my spouse disclaims a portion of my estate, then the portion so disclaimed shall pass to a credit shelter trust for my spouse’s benefit of which my spouse is the trustee.”  A disclaimer is a legal way for a beneficiary (the surviving spouse in this case) to say they don’t want something passing to them under a Will.  Yet, with a disclaimer credit shelter trust, the property disclaimed simply passes into a trust for the benefit of the surviving spouse.

This type of planning allows your estate plan to be very simple (an outright inheritance to the surviving spouse), yet preserves estate tax planning if that planning is beneficial at the time of the first spouse’s death (permitting the funding of a credit shelter trust through the use of a disclaimer). Many plans either don’t have this flexibility or are tied to the old federal and state estate tax laws, failing to take into consideration the changes that have occurred in the tax laws.

It’s income tax time again, so taxes are on everyone’s mind.  As an elder law attorney, the one question or comment that I hear the most has to do with gift taxes.  The federal gift tax engenders more misconceptions than any other issue of which I am presented.

Notice that I say federal gift tax.  There is no state gift tax of which I am aware.  Certainly, New Jersey does not impose a gift tax.  To my knowledge, only the federal government imposes a gift tax.

Most people who mention gift tax to me believe that there is some amount of money that they can gift in any one year without triggering a gift tax–$10,000, $11,000, $14,000.  People get those figures from a concept known as the annual gift tax exclusion.

The annual gift tax exclusion amount is indexed for inflation.  When I first started practicing, the annual gift tax exclusion was $10,000.  The amount—indexed for inflation—has increased to its current level of $14,000.

Most people tend to believe that if they gift more than $14,000 in any one year, they—or the recipient of the gift—will pay a tax, a gift tax.  But knowing the annual exclusion amount is really only part of the story, the small part actually.

The full rule would be as follows:  A person can gift the annual exclusion amount (currently $14,000) every year to an unlimited number of people without reducing his lifetime exclusion against gift tax.  It is the lifetime exclusion amount that makes gift tax irrelevant for almost all taxpayers.

A person’s lifetime exclusion amount is currently $5,490,000, a figure that is also indexed for inflation.  So, putting it altogether, a person can gift $14,000 a year to an unlimited number of people without reducing his $5,490,000 lifetime exclusion against gift tax.

In short, unless you have more than $5,490,000 in assets—and very few people do—you do not have to worry about gift tax.  A married couple can essentially double these credit amounts.  A married couple could gift $28,000 a year to an unlimited number of people without reducing their $10,980,000 lifetime credit against gift tax.  Very, very few people have that much money.

What then is this $14,000 all about?  Assume that Mr. Smith gifted $14,000 in a given year to 200 of his closest friends.  Assume further that Mr. Smith gifted $15,000 to one of his friends—perhaps just to show he liked him a bit more than the others.  Since Mr. Smith gifted $1,000 more than $14,000 to one person, Mr. Smith’s lifetime exclusion amount of $5,490,000 would be reduced to $5,489,000.

If Mr. Smith did, over the course of his lifetime, gift more than $5,490,000 taking into consideration his $14,000 annual exclusion amounts, then Mr. Smith, not the recipient of the gift(s), would pay gift tax.  A gift tax return—which is separate and apart from an income tax return—must be filed if Mr. Smith gifts more than $14,000 in any given year; however, unless he exceeds the lifetime credit amount, then there is no gift tax owed.

The recipient of a gift never pays gift tax.  The receipt of a gift is tax-free.

Now, there is another issue with gifting assts.  If Mr. Smith gifts his son stock that Mr. Smith has owned for years, then Mr. Smith’s son will receive Mr. Smith’s basis in the stock.  This means that if Mr. Smith purchased the stock for $1.00 and the stock is worth $10.00 today, then the son will have a basis of $1.00.  When the son sells the stock, the son will have to pay income tax on the $9.00 of gain.

If Mr. Smith died owning the stock, then the son would have received a basis step-up, meaning that the son’s basis in the stock would step up to $10.00.  When the son sells the stock, the son would not realize any gain and would not have to pay income tax on the sale of the stock.

As the Baby Boomer generation ages, more estate plans need to incorporate language that accommodates qualified retirement accounts, such as individual retirement accounts and 401(k) plans.  Qualified accounts are tax deferred accounts, meaning that taxes are deferred until the owner or the designated beneficiary of the account removes the money from the account.

Because the government eventually wants to receive the tax that it permits people to defer through a qualified retirement account, the rules governing these accounts require that the owner of the account and the beneficiary of the account after the owner dies remove money from the account over a specified period of time.

Every year, the owner or beneficiary must tax the required minimum distribution amount. This is the minimal amount of assets that the owner must remove every year.  The amount is recalculated every year based upon the owner’s age and life expectancy tables.  The younger an owner (or beneficiary) is, the longer the period of time over which the owner can remove the money from the qualified account.

An owner could remove all the money from the account in any given year; however, the owner must remove the required minimum distribution amount each year.

Sometimes, a person will come to me and tell me that he wants to establish a “stretch IRA.”  A stretch IRA is a concept, not a type of retirement account.

By naming a designated beneficiary of a young age, the beneficiary can stretch out the time during which there is money left in the IRA on which the beneficiary is not paying income tax.  For instance, if a beneficiary must remove money from the IRA over his life expectancy, then an eight-nine year old beneficiary is going to have to remove the money quicker (and in larger amounts) than a beneficiary who is ten years old.  A ten year old is expected to live much longer than an eighty-nine year old; therefore, the law permits the ten year old to remove the money much more slowly than an eighty-nine year old.

And the longer the money remains in the IRA, the longer income taxes are deferred on the money.  When a beneficiary removes money from the IRA, he must claim the amount removed as taxable income in the year in which he removes the money.

People who were born in the 1920’s and 1930’s tend to not have very much money in qualified accounts.  People who were born during these decades simply didn’t work when qualified accounts existed.  They tend to have defined pension plans, plans from their companies that pay them a fixed amount of money every month.

People who were born in the 1940’s and later tend to have more money in qualified accounts.  So as these people age and begin to plan their estates, they will need to take into consideration their retirement accounts.

If you wish to leave a portion of your estate to a person who is a minor, how do you efficiently do this? In most instances, when you leave money to a minor, you leave it to them in a trust.  A trustee is appointed to hold and administer the money for the minor until the minor attains a certain age, such as twenty-five.

With an IRA, you need to ensure that the trust qualifies as a designated beneficiary.  If the trust fails to meet the requirements to be a qualified beneficiary, then the money might have to come out of the IRA much more quickly, which could cause negative income tax consequences for the minor beneficiary.  The Internal Revenue Service has rules that a trust must satisfy in order to be a designated beneficiary—the trust must be irrevocable, valid under state law, the trust beneficiaries must be identifiable people, and a copy of the trust must be provided to the custodian of the IRA.  A failure to meet any of these rules could result in significant income tax consequences to the beneficiary.

When a person passes away, the executor of his estate must begin the process of administering his estate.  The basic steps of estate administration are submitting the Will to probate, gathering up the assets of the estate, paying the debts of the decedent, accounting to the beneficiaries, and distributing the assets of the estate to the beneficiaries.

Administering an estate is a lot of work.  It also involves the assumption of a lot a liability since the executor has a duty to perform his job with the utmost care.  What makes the administration of an estate even more difficult is when the beneficiaries are fighting.  But what makes beneficiaries fight and what can you do to reduce the likelihood that the beneficiaries of your estate will fight?

Sometimes it’s impossible to ensure the peaceful administration of your estate.  Some people just don’t get along and never will get along.  There are certain things, though, that make people fight more than others.

Ironically, tangible personal property—the “stuff” in your house—makes people fight more than any other asset.  Personal property, typically, has very little monetary value; in most cases, personal property has no monetary value.  For some reason—sentimental value, perhaps–families fight over tangible personal property more than any other asset.

Our law permits a person making a Will to create a tangible personal property list.  Through a tangible personal property list, a person can give away his assets without making mention of the property in the Will.

I’d recommend taking pictures of the items you wish to give away and numbering the pictures.  You can then create a list that says something such as “Item 1, diamond ring with gold band, goes to my son Joe Smith.”  You can keep the list and the pictures with your Will.

If you don’t create a list, then I’d recommend that your Will say that your executor is to divide the personal property equally among your children and that if your children cannot agree on the division of the property that the property is to be sold and the money divided equally among your children.  In this way, all of your children either agree on the division of the property or the property is sold.

You might have other methods of dealing with the division—drawing straws, pulling numbers from a hat, whatever.  The point is that you should develop some methodology for your executor to employ regarding the division of this property.  Your family might be able to handle the division of the property without issues, but I can assure you that if ten people are reading this article, one of their families would be helped by addressing the division of their personal property in a meaningful manner.

You can also ease the administration of your estate by consolidating your assets.  Many people have their assets spread out in multiple accounts.  Typically, the account balances are small.

If you consolidate your assets and have one or two accounts, you will make the administration of your estate easier, and you will cut down on the suspicion among the beneficiaries.  If Mrs. Smith dies and she had two accounts and all of her children know that she only has two accounts, then her children aren’t going to think that the executor is hiding assets from them.

A bit of preparation can go a long way to make the administration of your estate easier for your executor and reduce the likelihood that your children will fight over the administration of your estate.

There has been a lot of talk coming out of Washington, D.C., in the past several months about making Medicaid a “block grant” program.  The new administration is telling us that by making Medicaid a block grant program they are giving more control over Medicaid to the states.  The States, the Administration tells us, are in a better position to administer their Medicaid programs and to weed out fraud and other abuses.

It’s interesting to me that when the government intends to give people fewer benefits, they talk about increasing people’s choices and giving more freedom to the states.  Make no mistake about it, though, turning Medicaid into a block grant program will result in fewer benefits for the people who need the program.  The amount of money allocated to the Medicaid program will drop considerably and benefits will be cut.

Assuming my statement is true, which I believe it to be, should you care?  Many people might say “Good!  I hope they do cut the Medicaid program substantially.  Bunch of deadbeats living off the government.”  Or, they might say “Good!  There’s too much fraud in the Medicaid program.  People getting benefits they don’t deserve.”

Reducing or eliminating fraud is something most of us can get behind.  Why should the government spend money (the money at least 55% of us pay in income tax) to scammers and frauds.  I can’t speak to whether or not there is widespread fraud in the Medicaid program, but from my perspective, I don’t see fraud.

When I apply for Medicaid for a client, my client has to provide the Medicaid office with five years’ worth of bank statements for every account that he owns or has owned.  My client has to certify as to any gifts that he may have made in the past five years.  The Medicaid office reviews my client’s documents for several months before approving my client for benefits.

After my client is awarded benefits, even years after my client is approved for benefits, the Medicaid office does cross-checks with the Internal Revenue Service to see if my client’s social security number shows up on any financial accounts that my client failed to reveal in the application process. If the Medicaid office finds any such accounts, the office sends a letter to my client asking him to explain why he failed to disclose the account.  In most cases, the account was a closed account that my client simply forgot to disclose, but the Medicaid office does find the undisclosed account.

So, do I see fraud in the Medicaid application process?  No.  I don’t.  Does that mean that there is no fraud in the Medicaid program?  No.  I’m sure there is some fraud, but I don’t believe that you should throw out a good program simply because there is some fraud.

Would allowing the various states wholesale control over their Medicaid programs equate to something better for the people receiving benefits?  I doubt it.  What it will amount to is Medicaid programs that vary greatly from state-to-state.  New Jersey’s Medicaid program and Arizona’s Medicaid programs will be so different, for instance, that they will be unrecognizable to the people being benefitted by the programs.

Does this make sense?  No.  My clients, for instance, need Medicaid to pay for their long-term care needs—care in a nursing home, care in an assisted living residence.  Someone needing care in a nursing home in New Jersey does not have vastly different care needs than someone needing care in a nursing home in Arizona, so why should the ability of a person in New Jersey to qualify for Medicaid vary so much from a person in Arizona.

Now, you might be someone who thinks, I don’t care. Medicaid is out of control and the costs need to be reined in.  To me, that’s an okay way to think, until, of course, you or someone you know needs Medicaid.  But at least it’s an honest way to think about Medicaid.  Saying that making Medicaid a block grant program is going to give more freedom to the states to administer their Medicaid programs is disingenuous.  Code phrases such as “more choices” and “states’ rights” are really just ways of saying fewer benefits to you and me and those we love.