Guardian ad Litem

A recent appellate division case makes clear the role of a guardian ad litem.  When a person cannot handle his financial or medical affairs due to physical or mental disability, a guardian might be appointed for him.

In order to appoint a guardian for a person, a court action is required.  The court action must be supported by the reports of two physicians who have examined the incapacitated person and opined that he can no longer handle his financial or medical (or both) affairs due to mental or physical infirmity.

For instance, if Mr. Smith suffers a massive stroke, he may be unable to handle his affairs. If Mr. Smith failed to sign a power of attorney and an advanced healthcare directive, then no other person could make decisions for him.

Mr. Smith’s children will want to help him, but legally, they can’t because they don’t have the authority to make decisions for him or access his financial accounts (bank accounts, annuities, IRAs, etc.). One of his children will have to initiate a guardianship action.

Once the child files the guardianship action, the court will appoint an attorney for Mr. Smith. In a guardianship action, the court is being asked to declare that Mr. Smith  can no longer handle his affairs and that someone else (his child) has the authority to make decisions for him.  If the court decides this is the proper course of action, then the court is depriving Mr. Smith of fundamental rights—Mr. Smith can no longer make decisions for himself.

Since it is alleged that Mr. Smith can no longer make decisions for himself, the court must appoint an attorney for him to ensure that his fundamental rights are not inappropriately being taken away from him. That lawyer must advocate for Mr. Smith.  If Mr. Smith tells the attorney that he does not want a guardian, then the attorney must advocate for what Mr. Smith wants, unless what Mr. Smith wants is plainly harmful to Mr. Smith.

A guardian ad litem does not have the same role as the court appointed attorney. A guardian ad litem is appointed in some (not all) guardianship actions to opine as to what is in the best interests of the proposed ward, that is, Mr. Smith in my example.  Mr. Smith’s court appointed counsel might believe that Mr. Smith needs a guardian, but Mr. Smith might tell his attorney that he doesn’t want a guardian.  In such a case, the court could appoint a guardian ad litem to opine as to Mr. Smith’s need for a guardian.

Once the court declares that Mr. Smith is mentally incapacitated, the court could leave the guardian ad litem in place in order to accomplish some goal. The guardian ad litem could have a special skill from which the court believes Mr. Smith would benefit.  For instance, if Mr. Smith were being sued for an automobile accident in which he was involved, the court could appoint a guardian ad litem who is an attorney with extensive experience in litigation involving automobile accidents.

The court could empower the guardian ad litem to negotiate and enter an agreement disposing of the lawsuit against Mr. Smith. With such authority, the guardian ad litem could negotiate a settlement of the lawsuit against Mr. Smith and enter a settlement agreement disposing of the lawsuit.

A guardian ad litem is not appointed in most guardianship actions, but in some cases, the appointment of a guardian ad litem can be very beneficial. If a guardian ad litem is appointed, it is important to remember the differences between the court appointed counsel and the guardian ad litem, because even attorneys get their roles confused.

What Is a Trust?

Many clients ask me if they should have a trust.  The client has heard of some person who has a trust, and they believe that a trust would be appropriate for them.

A trust is a fiduciary relationship in which one person, called the trustee, is holding assets (cash, stocks, bonds, mutual funds, real estate) for another person, called the beneficiary.  A fiduciary relationship is one in which the fiduciary has the utmost duty of care to handle the assets of another person.  So, with a trust, the trustee is the fiduciary, holding the assets of the beneficiary with the utmost duty of care.

The person who establishes the trust is called the grantor.  The grantor places his assets into the trust.  The trustee holds and invests the assets of the trust.  And the beneficiary derives the benefits of the trust.

With many trusts, the grantor establishes the trust for the benefit of himself with some other person, such as his children, as remainder beneficiaries after his death.  In such cases, the grantor also serves as the initial trustee of the trust, with one of the children serving in the role of successor trustee after the grantor’s death.

Because a trust is really just one person holding assets for another person, the trustee can invest the assets of the trust any way a person can invest assets.  A trust could have its assets invested in multiple types of investments, just as a person could.  For instance, you are probably “invested” in real estate in that you own your home.  A trustee can invest in real estate by owning a home in the name of the trust for the benefit of the trust’s beneficiary.

You probably have a checking account.  A trustee could have a checking account in the name of the trust.  You could invest in CDs, stocks, mutual funds, and annuities.  A trustee could invest in CDs, stocks, mutual funds, and annuities.

If Joseph Smith were invested in stocks, the stocks would simply be titled “Joseph Smith.”  If Joseph Smith were the trustee of a trust for the benefit of his nephew, Mark Jones, then the stocks would be titled “Joseph Smith, Trustee, of the Mark Jones Trust.”  Titling the stock in this manner would show that Joseph Smith is holding the stocks for the benefit of Mark Jones in a trust.

If Joseph Smith wanted to invest the assets of the trust in real estate, mutual funds, annuities, bonds, etc., all of the accounts or assets in which the trusts was invested would be titled “Joseph Smith, Trustee, of the Mark Jones Trust.”  The trust could invest in one asset or twenty assets, just as you could invest in one asset or twenty assets.

The only limitation to the manner in which the assets are invested is that the trustee must always bear in mind his duty of care to the beneficiary.  When it comes to investing, the trustee must be guided by the Prudent Investor Rule.  The Prudent Investor Rule requires the trustee to invest the assets of the trust in a prudent—careful—manner.

Whether a client needs a trust or would benefit from a trust is always a question of fact given the client’s particular set of circumstances.  A trust is not the right choice for every client.

Many trusts are revocable, meaning that the grantor of the trust can amend or completely revoke the trust any time the grantor chooses.  Revocable trusts often come in handy for estate planning purposes when a client owns real estate in another state, for instance, in Florida.

An irrevocable trust is a trust that cannot be amended or revoked by the grantor.  The grantor could designated another person, such as the trustee or someone else, who could modify or terminate the trust, but in order to be irrevocable, the grantor cannot retain the power to modify or terminate the trust.  Irrevocable trusts are often used to remove assets from the name of the grantor and gift those assets to other persons.

Off to College: Did You Forget Something?

A financial power of attorney and an advanced healthcare directive can be two of the most important documents that you ever sign.  A financial power of attorney permits someone else, called the “agent” or “attorney-in-fact,” to make decisions for the person who signs the power of attorney, called the “principal.”

A power of attorney is only effective when the principal is alive.  Once the principal dies, the agent’s power of attorney authority ends.  Moreover, a principal is always free to revoke any power of attorney authority that he has granted to his agent.

Once a person attains the age of eighteen, no one can make decisions for him unless that person is his power of attorney or court-appointed guardian.  As silly as it may seem, the age of eighteen is the age of majority, and once a person attains that age, he is an adult.

Some people think a spouse can make decisions for you simply because of his/her status as a spouse. This is not the case.  For instance, if Mr. Smith owns an IRA and he is mentally incapacitated, Mrs. Smith would not be able to access that IRA unless Mr. Smith executed (signed) a power of attorney in her favor or she is the guardian of her husband.

When clients come to see me, I always tell them that a Will is important, but a financial power of attorney is even more important.  A Will is for other people.  A Will is only effective after you die, so a Will is not really for you; it’s for those you love.

A power of attorney is for you.  The power of attorney permits someone else to take care of you if you cannot take care of yourself.

An advanced healthcare directive is essentially a financial power of attorney but for healthcare decisions.  The directive grants authority to someone else (called the “agent” or “proxy”) to make decisions for you.  Through an advanced healthcare directive, you can grant someone the authority to access your medical information, which is important given privacy laws.

Over the years, I have had a few clients who I would consider to be good planners contact me about planning for a child of theirs who was going away to college.  The child was about eighteen years of age and the parent realized that if something happened to the child when the child was away at college, the parent would not be able to make decisions for the child.

These parents have contacted me and asked that I draft a financial power of attorney for the child.  This is a smart move.  Now that the parent has a power of attorney, he can continue to make financial decisions for the child.

The parent can still handle the child’s banking, even if the child is perfectly healthy, and if something were to happen to the child—for instance, if the child were to get into an accident—the parent can handle the child’s financial affairs.  Furthermore, the parent could make healthcare decisions for the child and access the child’s healthcare information.

As much as none of us would ever want to think about something happening to one of our children, what would make the situation many times worse is being told that you don’t have authority to make important financial or healthcare decisions for the child who now desperately needs your help.  Eighteen is what the law considers an adult, so your authority over your child legally ends once he attains the age of eighteen.


Calculating a Just Penalty

Medicaid is a health payment plan for needy individuals.  What this means is, if a person qualifies for Medicaid, the Medicaid program will pay for many of the person’s health care needs.

In order to qualify for Medicaid, the person’s assets must be below a certain level, typically $2,000.  His income must be insufficient to pay for his care; for instance, if he is living in a nursing home costing $12,000 a month, then his income (Social Security, pension) must be less than $12,000 a month.  Finally, he must meet certain clinical criteria.  He must require hands-on assistance with three of the basic activities of daily living, such as clothing, bathing, toileting, eating.

If the person meets all three of those criteria, then he can qualify for Medicaid.  If he is residing in a nursing facility, the Medicaid program will pay for most of the costs associated with his care at the nursing home.  Medicaid will also help pay for care in an assisted living residence and at home.

When a person applies for Medicaid, the Medicaid Office requests financial documents for the past five years.  Essentially, the Medicaid Office is performing a forensic accounting of the applicant’s finances for the past five years.  The Medicaid Office is looking to verify that the applicant has less than $2,000 in assets currently and that the applicant has not given away any assets in the past five years.

If the applicant has given assets away in the past five years, then he will be rendered ineligible for Medicaid for a period of time.  The more the applicant gave away in the past five years, the longer the period of ineligibility.  The period of ineligibility is called a “penalty period.”  During a penalty period, the applicant must pay for his care privately; Medicaid will not pay for his care during the penalty period.

A penalty period is calculated by taking the aggregate assets that the applicant gave away during the five years immediately preceding the date of his application, called the “lookback period,” and dividing that figure by a penalty divisor figure that the State publishes every year.

The divisor is supposed to be based upon the average cost of a semi-private nursing home room in the state in which the applicant lives.  So, for instance, if the average cost of a nursing home is $400 in New Jersey, then the penalty divisor is $400.  If the applicant gave away $12,000 during the lookback period, then the applicant will be ineligible for Medicaid benefits for one month, because a $400 daily penalty divisor is equal to $12,000 a month ($400 * 30 = $12,000).    If the applicant gave away $24,000 during the lookback period, then he would be ineligible for two months.

Last year, in 2017, the state published a divisor figure that was $423 per day.  This year, the state is attempting to publish a daily divisor figure that is only $343 per say, or approximately $80 lower than last year’s divisor number.  This would result in longer penalty periods for people applying for Medicaid benefits because the divisor figure is lower.

This is odd because the cost of nursing homes in New Jersey keeps increasing every year.  The cost of a nursing home certainly did not decrease by 19% from 2017 to 2018 ($80/$423 = 19%).

There are several hundred nursing homes in New Jersey, and the divisor figure is supposed to reflect the average cost of care at all of them. From my perspective in Monmouth County, I can say that the cost of a nursing home ranges from $350 per day to $450 per day.  I think the state may need to look at the figures it is using again to ensure the accuracy of the divisor.

My Will, My Way

A person’s last will and testament is called his “Will” because the document is supposed to reflect the will (or intention) of the person signing the document.  A person making a Will is called the “testator.”  Another way of saying this is, the document called a Will reflects the intention of the person making the document with respect to how his property will pass after his death and who will handle his affairs, typically called the executor.

Wills are to be read in a manner that effectuates the intention of the testator as expressed in the Will document, as closely as possible.  It is said that a Will is to be interpreted in a manner that effectuates the probable intent of the testator.  We do not read Wills as a typical legal document looking for mistakes that might make the Will fail; instead, we read a Will in a manner that effectuates the intentions expressed in the Will as best as those intentions can be accomplished.

Through a Will, a person can effectuate any purpose he wants with his assets subject to a few, very limited exceptions.  A Will cannot be used to accomplish a desire that is contrary to public policy.  For instance, a testator could not say, “I give my entire estate to my daughter on the condition that she divorces her Irish husband.  I don’t like people who are Irish, so my daughter must divorce her Irish husband in order to receive my estate.  If she doesn’t divorce her husband, then my estate shall pass to the dogs.”  Such a devise (which is the name given to an inheritance under our laws) is against public policy.

If a person’s Will contained a devise such as this, the offending language would be stricken from the Will.  In this case, the daughter would receive the inheritance without the requirement that she divorce her Irish husband.

In a Will, a person can leave his property to whomever he wants, with one exception.  If the testator is married, his spouse may be able to receive one-third of his estate even if he disinherits his spouse.  In other words, if Mr. Smith disinherits his spouse and leaves his entire estate to his children, Mrs. Smith might be able to claim one-third of Mr. Smith’s estate.  This is called an “elective share.”  Whether Mrs. Smith can obtain any of Mr. Smith’s estate depends on the amount of money Mrs. Smith has in her name.  The more assets she has in her name, the less she will receive from Mr. Smith’s estate.

Other than a spouse’s right to claim against a deceased spouse’s estate and public policy concerns, the testator is free to leave his estate any way he chooses.  If a person has four children, he is free to leave his entire estate to three of them and disinherit one of them.  He doesn’t have to leave the disinherited child $1 or $5 or any other arbitrary sum.  Mr. Smith is free to simply disinherit the child.

A Will is a document that is designed to reflect your intentions.  Through it, you can leave your property how you want, to whom you want.  It’s your money, so as long as you don’t offend common decency, you can do with your property what you want.

Is a Will Important?

A last will and testament can be a very powerful legal document.  It has the potential of disposing of all of your property after your death.  A Will could control tens of thousands dollars or even millions of dollars of assets, depending upon the worth of the deceased person.  On the other hand, a Will might control nothing.  It depends on what assets the decedent owned and how those assets were titled.

A Will is only an effective document after the person who made the Will dies.  During his life, his Will has no effect at all.  A person can always change his Will until the day he dies.  This is why we call it the “last will and testament.”  The only important Will is the last will that the person made before he died.  All prior Wills are meaningless.

If a person dies without any assets, then his Will won’t control any assets.  Sometimes, a client of mine will be a recipient of Medicaid benefits and his family will say something such as “Dad doesn’t have a Will.  Does he need one?”  If dad is receiving Medicaid benefits, then he would have to own less than $2,000 in assets.  So, he might need a Will, but his Will isn’t going to control many assets.

There are non-financial aspects of a decedent’s affairs that can be controlled through his Will.  For years, I have nominated a funeral agent in my clients’ Wills.  This is a person with authority to direct the funeral arrangements for the deceased person.  This could be very important if there is a dispute as to how the deceased would like his remains handled.  Funeral directors like it if there is a nominated funeral agent, so I have nominated a funeral agent in my clients’ Wills to handle this situation.

A Will may or may not control the decedent’s assets.  It depends on how the decedent titled his assets.  When a person dies, his assets pass in one of three ways—by operation of law, by contract, and by probate.  If all of person’s assets pass by operation of law or by contract after his death, then his Will won’t control how any of his assets pass.

An example of property passing by law is when a husband and wife own their home jointly.  When a husband and wife own a home jointly, they own it as joint tenants with right of survivorship.  This means that when one spouse dies, the other spouse becomes the absolute owner of the entire property.  Nothing needs to be done to effectuate the vesting of absolute ownership in the surviving spouse.  The property passes to the surviving spouse by operation of law.

An example of property passing by contract is a life insurance policy that names a beneficiary.  When the insured dies, the insurance policy pays out to the named beneficiary.  The contract, the life insurance policy, controls who will receive the proceeds of the insurance when the insured dies.

A person might die with nothing but property that passes by operation of law or by contract.  Typically, when the first spouse dies, his Will doesn’t have to be probated because everything passes to the surviving spouse in one of these two ways.

On the other hand, a Will might control some of the decedent’s property or all of the decedent’s property.  For this reason, a Will can be very important.  In fact, in my opinion, it is wise to ensure that some of your property passes under your Will because you need to leave your executor with some assets with which to pay your final debts—funeral expenses, medical expenses, credit card bills, and utilities for your house.  Without any assets, your executor can be left in the unseemly positon of having to beg or to sue the individual who received your assets by operation of law or by contract in order to pay your debts.

Dying without a Will

What happens if you die without a last will and testament?  Many people believe that if they die without a Will, their money goes to the State.  This isn’t true.  What really happens is that your money passes to those individuals whom various state statutes designate.  These statutes are known as the Intestate Succession Statutes.

When an individual dies, his assets pass in one of three ways to his heirs—by operation of law, by contract, or by Will or intestate succession if he dies without a Will.  If a married couple owns a house together, when one spouse dies, the house passes automatically to the surviving spouse.  The house is said to pass by operation of law to the surviving spouse.  The death of her spouse means that she owns the entire house in its entirety.  She doesn’t have to do anything to become the absolute owner of the property.

When a life insurance policy is paid to a beneficiary after the death of the insured, this is an example of property passing by contract.  The life insurance policy—the contract—dictates who will receive the property after the death of the insured.

If property isn’t passing by contract or by operation of law, then the individual’s Will controls who receives the property, and if the individual does not have a Will, then the intestate succession statutes control who will receive the property that does not pass by operation of law or by contract.

The intestate succession statutes are essentially what the New Jersey government believes to be fair to the surviving relatives of a deceased individual who dies without a Will.  If you are a surviving relative of an individual who dies without a Will, you cannot challenge the intestate succession statues.  In other words, you cannot say, “I took care of Aunt Rosie, so I should get all of her money, not you.  You did nothing for her!”

Assuming that you actually did help Aunt Rosie no less fervently than Mother Teresa cared for the sick of Calcutta and her other relatives did absolutely nothing—in fact, let’s assume that the other relatives hated Aunt Rosie and let their hatred be known—it’s irrelevant.  If Aunt Rosie dies without a Will, then her assets are going to pass in the manner specified in the intestate succession statutes.

Those statues are the embodiment of what the government believes to be fair and equitable and those statutes are unassailable.  Aunt Rosie did not take the time to draft a Will for herself, so the government wrote a Will for her.

The people who will receive your estate if you die without a Will are a series of progressively less closely related individuals to you.  Your spouse and your children are in the first tier of potential heirs.  Next comes your parents, then your siblings, then your aunts/uncles, then your cousins, and so on down the blood line.  Only if you have no relatives would your property pass to the state.

In most cases, a deceased person has some relative.  The decedent might not have even know the person who inherits his estate.  Such a person would be known as a “laughing heir,” because unlike close relatives who are saddened by the death of their loved one, laughing heirs are someone who never knew the decedent yet inherit his money.

Within a class of relatives of the same degree, relatives of the half blood inherit the same as relatives of the whole blood.  What this means is, a half-brother inherits the same amount as a whole-blood brother of the decedent.  A cousin of the half-blood inherits the same amount as a cousin of the whole-blood.  This is important in today’s society of second and third marriages.

Using Living Trusts Wisely

Many clients ask me if they should have a revocable living trust.  These clients may have heard how a revocable living trust is better than a last will and testament.  Often they seek to avoid the tangles and delays of probate.

The word “revocable” means the trust can be revoked without the consent of another individual.  So, for instance, if Mr. Smith established a revocable living trust, Mr. Smith retains the right to revoke the trust any time he wishes.  He can also modify the trust any time he wishes.

The word “living” means that the trust is created during Mr. Smith’s life.  The opposite of a living trust would be a testamentary trust.

A testamentary trust is a trust established in the last will and testament of a decedent. Mr. Smith can establish a living trust during his life, but he would establish a testamentary trust in his Will.  A testamentary trust, like a Will, is only effective when a person dies.  A living trust is effective when the person is alive.

Because a revocable living trust is effective when Mr. Smith is alive, Mr. Smith can put assets into the trust during his life. He can title his house into the trust or his bank accounts.  Theoretically, he could transfer most of his assets into the trust, bur some assets, such a car, might be difficult to transfer into the trust because it would be difficult to insure a car if it were owned in a trust.

I often draft revocable living trusts for clients. In most instances, the client owns real estate in another state, such as Florida.  I advise the client to have a revocable living trust in order to avoid probate in the other state.

If Mr. Smith owns real estate in Florida at the time of his death, then his Will would have to be submitted to probate in New Jersey and Florida. By re-titling his Florida house into his revocable living trust, his estate will avoid having to submit his Will to probate in Florida.  To me, avoiding probate in two states is worth the extra time and effort it takes to re-title Mr. Smith’s house into a living trust.

On the other hand, simply avoiding probate in New Jersey is not worth any extra time or effort. The process of submitting a Will to probate in New Jersey is very simple and very inexpensive.  The cost of probating a Will in New Jersey is about $150 whether the value of the estate is $100,000 or $10,000,000.

Because there are some assets that are difficult to place into a trust, such as a car, in most cases, a person cannot avoid probate with a revocable living trust. And whether a person’s Will has to be submitted to probate for a $10,000,000 estate or for a car only, the cost and time involved in submitting a Will to probate is exactly the same.  For that reason, in most cases, I typically don’t recommend having a revocable living trust if you don’t own real estate in another state.

To make matters even more complicated with a living trust, I have seen many couples who have joint revocable living trusts. A joint revocable trust is a trust that is established by both members of a married couple and that is funded with the assets of the couple.  For instance, Mr. and Mrs. Smith put all of these assets into one trust.  When either spouse dies, his/her assets typically pass into a sub-trust inside the main trust for the benefit of the surviving spouse.  When the surviving spouse dies, all of the assets typically pass to the couple’s children.

The problem with these trust is, the trust documents are frequently very long, very complicated legal documents. Ironically, Mr. and Mrs. Smith established the trust to avoid costs to their estate and complications, but the time involved in properly administering a joint living trust far outstrips the costs of having separate Wills for each member of the couple.

Living trusts can be useful tools that can reduce the cost and expense of estate administration after your passing, but if used improperly, they can actually result in significantly greater costs to your estate.

I Want To Qualify for Medicare

I’m an elder care attorney, so many people come to see me about a family member’s long-term care needs. Many of them will say to me, “We want to qualify our mother for Medicare.”  To which, invariably, I will say, “You mean Medicaid.”

Those who confuse Medicare and Medicaid typically are the children of the person who requires long-term care, and typically, the children are not old enough to be enrolled in Medicare themselves. Given this fact, there confusion is somewhat natural.

Even those who are old enough to be enrolled in Medicare wonder if their potential receipt of Medicaid benefits will disqualify them from their Medicare benefits. In other words, they wonder if they will be disenrolled from Medicare benefits if they qualify for Medicaid benefits.

But what is the difference between Medicare and Medicaid?  And does qualification for Medicaid affect a person’s Medicare benefits?  If so, how does it affect those benefits?

Medicare is a government health insurance program.  Taxpaying workers in the United States pay into the Medicare program through deductions from their pay during their working years.  A person must work a certain number of quarters (three-month periods) in order to qualify for Medicare, typically, forty quarters or ten years.

Once a worker satisfies the forty quarters of work, he must either be aged, which is defined as aged sixty-five, or disabled in order to qualify for Medicare benefits.  Most people qualify based upon age, not disability, though there are a lot of people who qualify based upon disability.  Beneficiaries who qualify based upon age begin receiving benefits immediately.  People who qualify based upon disability must (in most cases) wait twenty-four months before they begin receiving Medicare benefits.

Like most policies of insurance, Medicare has deductibles and co-payments.  To cover these gaps in the insurance, there are private policies of insurance called Medigap policies (shore for Medicare gap policies).  There are ten different, standard Medigap policies with different levels of coverage.  The better the policy the more of the deductibles and co-payments that the Medigap policy will cover.  Of course, the more the policy covers the more the premiums will be for the policy.

Medicare does not cover long-term care services.  Medicare will cover some rehabilitative services, and for this reason, Medicare is often confused with insurance that covers long-term care costs.  For instance, if Mr. Smith falls and breaks his hip, he will go to the hospital first, then he will go to a rehabilitation facility.  The rehabilitation facility is, in most instances, a nursing home.  Medicare will help pay for Mr. Smith’s care in the hospital and it will pay for up to 100 days of rehabilitative services in the nursing home.  I think, for this reason, many people believe that Medicare pays for long-term care services, but it doesn’t.  It only pays for rehabilitative services.

A person who worked the requisite quarters will qualify for Medicare benefits even if the worker is rich.  Bill Gates, for instance, will qualify for Medicare benefits when he attains the age of sixty-five.

Unlike Medicare, Medicaid is means-tested.  That means that in order to qualify for Medicaid, a person must have a limited amount of assets (typically less than $2,000), and he must have insufficient income to pay for his care.  Medicaid is a health payment plan, not health insurance.  Medicaid will pay for certain services if a person qualifies.

Medicare and Medicare are mutually exclusive.  A person can qualify for both Medicare and Medicaid.  Qualification for one program does not disqualify a person from eligibility for the other program.  Also, unlike Medicare, Medicaid will pay for long-term care services.

The State of New Jersey Death Taxes

For many years, New Jersey was one of the most expensive states to die in.  Most states have no “death taxes,” which could include an estate tax or an inheritance tax.  New Jersey, on the other hand, had both.  Starting this year, New Jersey no longer has an estate tax, but we still impose an inheritance tax.  So, what’s the difference and does the inheritance tax affect you?

An estate tax is a tax imposed upon the gross value of the estate.  Around 2001, the federal government began increasing the credit equivalent against the federal estate tax quite dramatically.  A credit equivalent in the amount you can pass to your heirs without paying an estate tax.  In 2001, the credit equivalent was $675,000, so if you died with an estate worth $675,000 or less, then your heirs would pay no estate tax.

Soon after 2001, the credit equivalent began to rise.  Currently, you have to die with more than $11,000,000 to pay federal estate tax.  A married couple would have to die with more than $22,000,000 to pay federal estate tax.

When the federal government began increasing the credit equivalent dramatically, the state of New Jersey froze its credit equivalent at $675,000, and for years, that’s where our credit equivalent remained.  Estates worth more than $675,000 were potentially subject to the New Jersey estate tax.

In 2017, we increased the credit equivalent to $2,000,000, and in 2018, we completely eliminated the New Jersey estate tax.  The upshot of all of this is, if you live in New Jersey and have an estate worth less than $11,000,000, you aren’t paying any estate tax—federal or state.

Some estates in New Jersey, though, could be subject to New Jersey inheritance tax, and I have recently met with several people who are interested in protecting their estate from the inheritance tax.  New Jersey has long had an inheritance tax.  In the past, the inheritance tax received less attention because the estate tax affected more estates.  Now, with the elimination of the estate tax, the inheritance tax is the only thing to focus on.

The inheritance tax, like the estate tax, is imposed based upon the value of the inheritance an individual receives, but unlike the estate tax, the primary focus of the inheritance tax is the relationship that the decedent bore to the heir.  In other words, was the person who died a parent? A child?   A spouse?  Or an Uncle?  That relationship determines whether or not the estate will be subject to inheritance tax.  The value of the inheritance could change the rate of tax that the estate pays.

With inheritance tax, a parent, spouse, child, grandchild, or other lineal descendants pay no tax.  Stepchildren are also part of this non-tax paying group, but step-grandchildren are not part of the group.  More distant relatives—brothers, sisters, cousins, nephews, etc.—are subject to the inheritance tax; however, the rate of tax and any exemptions against the tax vary somewhat.  Individuals who are more closely related pay less tax and have a higher exemption.

Non-relatives, such as friends, are also subject to the tax. Charities are exempt from the tax.

So, how do you avoid or plan against the inheritance tax? The answer is, there really is no easy answer.  Move to another state is probably the first response a lawyer would give you.  Most states do not impose an inheritance tax, so if you lived in another state, your estate would not pay New Jersey inheritance tax.

The only other way to avoid the tax is to give the property to your heirs before you die as a gift, but you must give the assets away three years before you die because gifts made less than three years before your death are brought back into your estate and taxed.