The Benefits of Choosing for Yourself

Who would make decisions for you if you couldn’t make decisions for yourself?  Does the person you would choose know that you want him to make decisions for you?  Does the person have the legal authority to make decisions for you?

One of the most important estate planning documents that a person can have is a financial power of attorney. A power of attorney permits one person—called the agent or attorney-in-fact—to make decisions for someone else, called the principal.

Without a power of attorney, no one can make financial decisions for you, not your spouse, not children.  No one.  While you may own many accounts jointly with your spouse or with a child and that joint form of ownership permits the joint owner to access the account, too, some assets cannot be owned jointly, such as an IRA or 401(k).

And it is questionable whether you should own assets jointly with your children because of the inherent dangers with this form of ownership. For instance, if you own a bank account jointly with your son and your son is sued, then the money in the joint bank account might be attached by your son’s creditors.

I have always told my clients and readers of this column that not only should they have a financial power of attorney, but a power of attorney that is very comprehensive. You want to draft the power of attorney so that your agent can perform any financial act for you that he may have to take.

I frequently meet with the spouse or child of an elderly person who requires long term care, such as care in a nursing home.  The spouse is asking me to help him qualify his wife for Medicaid benefits.

Inevitably, the planning that I will recommend to the healthy spouse involves transferring all of the couple’s assets to the healthy spouse’s name alone. With a married couple, most of the assets are owned jointly between the spouses.

Transferring assets from the wife to the husband is a gift of the assets being transferred. A power of attorney document that is not comprehensive will not address gifting of assets.  If the power of attorney document doesn’t specifically permit the agent to gift the principal’s assets, then the agent cannot gift the assets.  So, if the husband is the wife’s power of attorney agent, then he would not be able to gift the assets titled in his wife’s name to himself using the power of attorney.

Absent an adequate power of attorney document, the only alternative for the husband would be to file for guardianship over his wife. A guardianship action is a court action.  The husband would have to obtain the reports of two doctors who opine that his wife cannot handle her affairs.  The husband would have to hire a lawyer to file the guardianship action for him.  The court would appoint a lawyer for the wife.

In the context of the guardianship, the husband would have to request the court’s permission to gift the wife’s assets to himself as part of the process of qualifying her for Medicaid. The court may or may not honor the husband’s request to gift the assets to himself.  The point being that if the wife had signed a power of attorney document giving the husband the authority to gift her assets to himself, none of this would have been required.

The expense of the guardianship—several thousand dollars—could have been avoided. The uncertainty of whether or not the court will permit the husband to gift the assets to himself could have been avoided.  Executing a power of attorney document permits you to choose the person who will make decisions for you and the kind of decisions that person can make.

2017 Wrap Up

The death of the New Jersey estate tax will soon be upon us.  In 2017, the credit against New Jersey estate tax (technically called the credit equivalent exemption) rose from $675,000 to $2,000,000.  The credit had been $675,000 for many years prior to 2017.  What this means is, if a person died prior to 2017 with an estate worth less than $675,000, his estate paid no New Jersey estate tax.  In 2017, if an individual died with an estate worth less than $2,000,000, his estate paid no estate tax.

Effective January 1, 2018, there will be no New Jersey estate tax, irrespective of the value of the estate.  So, if a person dies with an estate worth $10,000,000 after January 1, 2018, his estate will not be subject to New Jersey estate tax.

For the time being, there will still be a federal estate tax.  The credit against federal estate tax is $5,490,000.  A married couple can easily shelter twice that amount, or approximately $11,000,000.  The current federal tax proposal that the Republican Party is pushing calls for a repeal of the federal estate tax.

Given the fact that most people have nowhere near five and half million dollars, the vast majority of New Jersey residents will not pay any estate tax after this year.  New Jersey will continue to have an inheritance tax.

The New Jersey inheritance tax is imposed primarily based upon the relationship of the beneficiary to the decedent.  A surviving spouse, child, grandchild, or other lineal descendants pay no inheritance tax.  A charity that is a beneficiary of an estate would pay no inheritance tax.  Other relatives and non-relatives, such as brothers/sisters, nieces/nephews, and friends, would pay an inheritance tax.

There is no state gift tax.  A person can give away an unlimited amount of money and the state of New Jersey will not impose a gift tax on the amount given away.  There remains a federal gift tax, however, the credit against the federal gift tax is the same as the credit against the federal estate tax, that is, $5,490,000.

What this means is—and contrary to popular misconception—a person would have to give more than $5,490,000 before he would ever pay a federal gift tax.       But I thought I could only gift $14,000 a year! The $14,000 “rule” is only half the story.  The full story is, you can only gift $14,000 a year to an unlimited number of people without reducing your $5,490,000 lifetime credit against federal gift tax.  So, if you don’t have $5,490,000, then don’t worry about federal gift tax.  The current Republican tax proposal does not call for an elimination of the gift tax.

The fact that there is no estate tax (or effectively no estate tax because most people have nowhere near the federal exemption amount) means that people are not as constricted as they were in the past when engaging in estate planning.  Most people simply do not need to consider estate tax issues when putting together an estate plan.

In my opinion, this—along with other changes in the laws governing trusts in New Jersey—opens up other planning opportunities for people.  Instead of worrying about estate tax, you should worry about how your estate is transferred to your children.

You should be thinking about things such as What would happen if my child is sued? What if my child gets divorced? and What if my child dies after me? What will happen to the inheritance I left my child in these situations? The solution may be a trust in your Will for the benefit of your child, a bloodline or dynasty trust.  Given recent changes in New Jersey trust law, your child could be the trustee of his trust and his inheritance would still be protected from his potential problems.

Income-Only Trust Assessed Correctly

Recently, Meghan Davey, the Director of the New Jersey Division of Medical Assistance and Health Services, issued a final agency decision that correctly states the correct law governing irrevocable trusts. Ms. Davey’s decision is important, because the counties are beginning to interpret the law governing trusts in an incorrect manner.  County workers need proper guidance as to how to analyze trusts, so they don’t improperly deny applicants Medicaid benefits to which they are entitled.

Medicaid is a federal and state health payment plan for needy individuals. If a person qualifies for Medicaid benefits, Medicaid will pay for many of the costs associated with long-term care, such as care in a nursing homes or assisted living residences.

The cost of long-term care can be exceedingly high. While some might debate the morality of planning to qualify for a government “welfare” program, the fact of the matter is Medicaid planning is perfectly legal and permissible.  Numerous courts have stated that Medicaid planning is something in which most competent people can and do engage.

Over the years, I have assisted many people in qualifying for Medicaid. I know for a fact that some of my clients were individuals who staunchly align themselves with conservative political thinking; the type of thinking that abhors big-government with its government welfare programs.  Yet, when it came time for a family member to benefit from Medicaid and Medicaid planning, these otherwise fiscally conservative thinkers were lining up to qualify for Medicaid.

And there is nothing wrong with that. It is a shame that our country treats health care in such a cavalier manner, almost blaming people for needing care.  People age and with age, we diminish in our capabilities and require the assistance of others.  If you are fortunate to live into your 80’s and 90’s, you will find yourself in need of the assistance more than you needed the assistance of others when you were in your 20’s and 30’s.

Putting aside the morality of Medicaid planning and the politics of the Medicaid program, the fact of the matter is, Medicaid is a law, a very complex law. A great many statutes make up the Medicaid Act.

If you enter a nursing home and seek to qualify for Medicaid benefits, you will file your application for benefits with the county board of social services for the county in which you reside. The county will process your application and can either approve or deny the application.

If the county denies your application, you have the right to take a fair hearing of the denial. A fair hearing is an administrative appeal of the denial of your Medicaid benefits.  The first step in a fair hearing is a hearing before an administrative law judge.

Whether the judge rules in your favor or against you, the judge’s decision is reviewed and passed upon by the Director of the New Jersey Division of Medical Assistance and Health Services. The Director, Ms. Davey, makes a final agency decision.  Her decision is the final administrative decision in your case.  If you disagree with her decision, then you have to appeal to the Superior Court of New Jersey, Appellate Division.

In a recent case, Director Davey correctly analyzed an irrevocable trust that is commonly known as an “income-only trust.” The trust is established with the funds of the applicant, typically more than five years before the date any application for Medicaid benefits if filed.

The trust entitles the applicant to payment from the income the trust generates (interest and dividends), but no right to payments from the principal of the trust. For this reason, the trust is called an income-only trust.

In the recent case, the county denied the applicant benefits. The county took the position that any trust an applicant establishes with his own money is prohibited no matter how many years have passed since the trust was funded, but Director Davey correctly analyzed the trust as an irrevocable income-only trust, which only entitled the applicant to the income.

Do I Need a Will?

One of the biggest impediments to an individual writing a last will and testament and other, important estate planning documents is procrastination.  People simply put it off to another day, then it never gets done.  Another impediment is the general gloominess of these documents.  A Will reminds us of our inevitable death, and who wants to think about that.  It would be like arranging your funeral at age forty.  Sure, we all know we are going to die, but we hope not tomorrow.

Many people will say to me, “I told my wife that it’s better to have a Will.  It is right?”

Now, my job involves drafting Wills, as well as powers of attorney and living wills, so of course, I’m going to say yes.  It’s in my best interest to say yes.  But in this case, the honest answer is yes, it is better to have your estate planning documents in place before something happens to you and here’s why.

A financial power of attorney and a living will for healthcare decisions are very important documents.  I often tell people that I believe these documents are more important for you to have than a Will, because these documents permit someone—your spouse, your children—to make decisions for you.

Without a power of attorney, no one, not your spouse, not your children, can make financial decisions for you.  Even if you own most of your assets jointly with your spouse or jointly with your children, there are still things that they cannot do for you unless they have a power of attorney.

For instance, no one would be able to access a bank account in your name alone without a power of attorney.  No one would be able to access your IRA or 401(k).  No one would be able to access your life insurance policies or sign any contracts for your, such as an admissions agreement to a long-term care facility if you required assistance.

Assuming you are married and most of your assets are owned jointly with your spouse, your spouse still could not sell the house or mortgage the house without your consent.

As for healthcare decisions, while a family member might be able to make medical decisions for you without your consent, nothing requires a medical professional to listen to a family member, and if the medical professional refuses to listen to the family member, there is no law that permits a family member to make medical decisions for you.  Furthermore, if your family members disagree as to your care, no medical professional is going to choose sides.

Nowadays, your medical information is protected.  Healthcare professionals are forbidden from sharing your medical information with anyone else, even family members, unless you appointed the person as your healthcare representative.  You can make this appointment in a living will.  Without the appointment, family members may not be able to access your medical information.

As for dying without a Will, there are numerous unintended consequences that could occur.  If you die without a Will, your property may pass to unintended individuals.  The law determines who receives your estate, and who that is may differ from who you wanted.

If you do not have a Will, you did not choose the person you wanted to handle your estate.  A court might appoint someone to handle your estate who is not the person you would have chosen.  If your estate passes to minors, then someone will have to appointed as the minor’s guardian.  Having a Will can avoid all these problems.

Will the Repeal of the Estate Tax Help or Hurt You?

Recently, President Trump put forth a proposal to repeal the federal estate tax.  Under existing law, estates with a gross value in excess of $5,490,000 are potentially subject to federal estate tax.  A married couple can easily shelter twice that amount (or $10,980,000) from the estate tax.

Chance are, you don’t own assets with a value anywhere near $5,490,000.  Chances are, you never will own asset with a value anywhere near $5,490,000.  So, the federal estate tax (and the federal gift tax, which also has an exemption amount of $5,490,000) will never affect you.

With that said, for some reason, people worry about the estate tax.  They believe that the estate tax will affect them.

In New Jersey, we also have a state estate tax, at least for another three months.  The current credit against New Jersey estate tax is $2,000,000.  Beginning January 1, 2018, the New Jersey estate tax will be repealed.  So, if your estate is in excess of $2,000,000, you only need to hang on for three more months and your estate won’t have to pay a New Jersey estate tax.

Assuming President Trump’s tax plan passes in the near future, there won’t be any estate tax—federal or state.  That’s a good thing, at least if you are worth in excess of $2,000,000.

Despite the fact that the estate tax (federal or state) only affects a very small minority of the population, the tax seems to bother a great many people.  I’ve never been sure why that is.  Perhaps it’s because, on whole, we are optimistic and we believe that someday we’ll be worth millions of dollars and we don’t want the government taxing our future fortune when we die.  Perhaps we love rich people and think they should be able to establish dynasties.  I’ve never been quite sure what it is that bothers people so much about the estate tax, but I can tell you that it does bother people.

But here’s a real consequence of an estate tax repeal that probably will affect you.  Currently, when a person dies, his assets receive a basis equivalent to the date of death value.  Typically, this results in a stepped-up basis.

For instance, assume that Mr. Smith purchased 100 shares of stock in IBM in 1965 for $20 a share. Over the course of the next 50 years, Mr. Smith’s IBM stock has split multiple times.  He now owns 3,000 shares of IBM stock, trading at $145 a share.  Mr. Smith doesn’t remember the price for which he purchased the stock or how many shares he initially purchased.

When Mr. Smith dies, his IBM stock—all 3,000 shares—will receive a stepped-up basis. What this means is that when his family inherits the stock, they will have a basis of $145 in each share of the stock.  If the family turns around and sells the stock, there would be no gain on the sale and, therefore, no capital gains tax to pay.

The reason we have basis step up is because of the federal estate tax. Essentially, it’s a trade-off.  Estates are potentially subject to paying an estate tax, so in exchange for paying an estate tax (or potentially being subject to a tax), the assets of the decedent receive a stepped-up basis upon death.

If there were no estate tax, there may not be any stepped up basis. From a practical standpoint, what this means is, Donald Trump’s children will not pay a 40% estate tax on his death, but your children will have to pay more in capital gains tax when they sell your stock.  The lack of a basis step up will hurt far more people than the estate tax ever would have affected.

Spousal Income Allowance

 

When a spouse enters a nursing home, the healthy spouse is often concerned about her ability to continue to support herself. For instance, Mr. Smith, aged 85, enters a nursing home.  Mr. Smith receives Social Security income of $1,000 per month and a pension of $1,500 per month.  Mrs. Smith, aged 81, remains at home.  Mrs. Smith has Social Security income of $700 per month.

Understandably, Mrs. Smith is concerned about her ability to pay her bills. For many years, she has relied upon both her and her spouse’s income to pay the household expenses.  Now, her spouse lives in a nursing home that costs $10,000 per month.  Mrs. Smith would like to qualify Mr. Smith for Medicaid benefits, but she is concerned as to what that means in relation to Mr. Smith’s income.  Will the nursing home take all of his income?

Medicaid is a health payment plan for needy individuals. In order to qualify for Medicaid benefits, an individual must have very limited assets.  The individual qualifying for Medicaid—in this case, Mr. Smith—can have no more than $2,000 in assets.  Mrs. Smith, who will remain at home, can retain ownership of the home.  In addition, she can retain all the personal effects in the home (cloths, furniture, appliances, etc.) and up to a maximum of $120,900 in cash type assets.

The $120,900 figure is a maximum figure. Mrs. Smith may not be able to retain that much in cash assets; it depends what the Smiths owned when Mr. Smith entered the nursing home.  For instance, if the Smiths only owned $150,000 in cash assets when Mr. Smith entered the nursing home, then Mrs. Smith would only be permitted to retain $75,000.

Then there is income. Mrs. Smith can retain all of her income, but in this case, her $700 isn’t going to get her very far.  She still needs to pay the real estate taxes, the utilities, the food bill, her own medical bills, etc.  For Mrs. Smith, life goes on, and now, she has to make due with substantially less income.

While her expenses will decrease somewhat. For instance, she is now only food shopping for herself, not Mr. Smith.  Many of Mrs. Smith’s expenses are fixed.  Her real estate taxes are not going to decrease simply because her husband resides in a nursing home.

In addition to permitting her to retain certain assets (the home, a car, the personal effects, and up to $120,900 in cash assets), Mrs. Smith may be permitted to retain a portion of Mr. Smith’s income.

Mr. Smith, in this hypothetical, has total monthly income of $2,500. Mr. Smith can retain $50 of his income as his personal needs allowance.  This is money that Mr. Smith can use to pay for clothing and haircuts and entertainment.  Mr. Smith can also use a portion of his income to pay his private health insurance premium.  The Medicaid program wants Mr. Smith to retain his private health insurance, so the program permits a deduction from his income to pay the premium for his health insurance.  Let’s assume that the premium for Mr. Smith’s health insurance is $200 per month.

Mrs. Smith can retain up to a maximum of $3,022 of Mr. Smith’s income. Mrs. Smith’s income allowance is reduced by her income.  In this example, Mr. Smith has $2,500 of monthly income.  He can retain $50 and his health insurance premium is $200.  So, the available income to Mrs. Smith is $2,250 ($2,500 – $50 – $200 = $2,250).  Mrs. Smith’s income allowance is reduced by her monthly income of $700, so in this case, Mrs. Smith would be able to retain $1,550 ($2,250 – $700 = $1,550) of Mr. Smith’s income as a spousal income allowance.

If Mrs. Smith had high monthly income, for instance, if Mrs. Smith’s income were $3,500 per month, then she would not be able to retain any of Mr. Smith’s income.

Time To Revisit Your Estate Plan

Recently, the New Jersey estate tax was modified. Prior to 2017, an estate with a gross value greater than $675,000 was potentially subject to New Jersey estate tax.  After January 1, 2017, the gross estate must be in excess of $2,000,000 in order to be subject to New Jersey estate tax.  Starting on January 1, 2018, the New Jersey estate tax will be completely repealed.

The federal estate tax will (for now) continue.  Currently, a gross estate must be in excess of $5,490,000 to be subject to federal estate tax.  In addition, there has been no change in New Jersey’s inheritance tax.  If any portion of an estate is left to an individual who is not the spouse, parent, child, or grandchild of the decedent, then the estate may be subject to New Jersey inheritance tax.

For years, clients of mine (and I’m sure clients of many other attorneys) planned for the New Jersey estate tax.  A common planning technique was to draft trusts into the Wills of a married couple.  These trusts were called credit shelter trusts or by-pass trusts.  The trusts were designed to take advantage of each spouse’s credit against the estate tax.

The trust would be drafted into each spouse’s Will, because you never know which spouse is going to die first.  When the first spouse dies, an amount up to the credit (for instance, $675,000) would pass into the trust.  The surviving spouse would typically be the trustee of the trust.

With credit shelter trusts, a married couple could shelter twice the $675,000 credit against New Jersey estate tax, or $1,350,000.  If a married couple currently had credit shelter trusts in their Wills, then they could shelter $4,000,000, or twice the $2,000,000 credit that currently exists.

Most of my clients who planned for the New Jersey estate tax had estates worth between $900,000 and $1,500,000.  In fact, I would say that 90% to 95% of the clients who I helped with estate tax planning owned estates in this range.

For those clients, estate tax planning with credit shelter trusts is no longer necessary.  While New Jersey may change the law before the tax is repealed in a few months or the State may lower the credit from $2,000,000, for now, most of my clients who engaged in tax planning no longer need to engage in this type of planning.

For those married clients of mine who did engage in tax planning, I would recommend that they re-visit their estate plans.  While a credit shelter trust is not harmful, it may be an unnecessary part of the client’s estate plan given the change in the law.

I have found that clients like a simple estate plan unless there is a reason to have a more complex plan.  For instance, if you can save $70,000 in New Jersey estate tax with a trust, then a trust makes sense.  But if a trust designed to save taxes no longer is necessary to accomplish that goal, then I don’t believe the client should have that type of trust.

There may be other reasons for a trust.  In the recent past, I have become a believer in establishing trusts to hold the inheritance of a client’s child, called a “bloodline trust.”  Since recent changes in the law make it clear that a child can serve as the trustee of his own trust and the trust can protect the assets from the creditors of the child, I believe that bloodline trusts are useful estate planning tools.

But a bloodline trust is not a credit shelter trust, so a client who has a credit shelter trust with an estate less than $2,000,000, probably would want to modify his estate plan.  A married couple who has an estate worth $1,500,000 could have simple Wills that simply leave the entire estate to the surviving spouse, then the children.

Can an Adult Child Be Forced To Support his Parent?

Can an adult child be held responsible to pay for the long term care costs of his parent in New Jersey? This is a concept called filial responsibility.  The short answer is, yes, under certain circumstances, an adult child could be held responsible for the care of his adult parent.

New Jersey does have a filial responsibility statute. New Jersey’s statute provides that a child of an individual who is receiving public assistance, such as Medicaid, can be ordered to support his parent if the child has sufficient means.  The “order” for support from the child of the parent can be entered by the appropriate county board of social services or any court of competent jurisdiction acting on its own initiative or upon information provided by any individual.

In other words, the board of social services can order the adult child to support his parent or a court can enter such an order if any person with knowledge of the situation informs the court that the adult child has the means to support his parent. A child over the age of fifty-five cannot be forced to support his parent.

A healthy spouse can also be ordered to support his ill spouse who is receiving public assistance. There is no age exception for a spouse, so a spouse of any age, if of sufficient means, could be ordered to support his ill spouse.

Pennsylvania, like New Jersey, has a filial responsibility statute, too. In Pennsylvania, the state has somewhat aggressively sought to enforce its statute.  Apparently, the Pennsylvania statute is broader than the New Jersey statute.  The Pennsylvania statute does not have as many exceptions to support (such as the exception for a child over the age of fifty-five mentioned above).

A recent court case involving a disabled child residing in Pennsylvania reignited some interest in the filial responsibility statute. In this case, the “child” was thirty-one years of age.  He (the child was a son) had been disabled since birth.  The son resided in a long-term care facility in Pennsylvania; however, his parents were New Jersey residents.

The Pennsylvania long-term care facility that provided care to the child sought to obtain a support order against the child’s parents, who resided in New Jersey. The Pennsylvania filial responsibility statute would permit the long-term care facility to obtain an order of support against the parents.  New Jersey’s filial responsibility statute would not permit the facility to obtain an order of support against the parents because the parents were over the age of fifty-five.

The case was a “choice of law” case. When you have a case that involves two states, such as New Jersey and Pennsylvania, a question can arise as to which state’s law applies.  As in this case, one state’s law might differ from the other state’s law and that difference can have a profound impact on the case.

In this recent case, the court held that since the parents resided in New Jersey and the support order was sought against the parents, New Jersey law applied to the case. Since New Jersey law applied to the case and since the parents were over the age of fifty-five, the parents were sheltered from supporting their adult child.

These parents were protected from having a support order entered against them; however, if the child were under the age of eighteen or if the parents were younger than fifty-five, then New Jersey law would have permitted the long-term care facility to proceed against the parents for a support order.

New Jersey’s filial responsibility law is something to bear in mind. An adult child could be held liable to pay for the care of his adult child in New Jersey.  Just because it hasn’t happened to date, doesn’t mean that it cannot happen.

Increasing the Personal Needs Allowance

Recently, the state of New Jersey increased the amount of money that a Medicaid beneficiary can retain from his income when he is living in a nursing home.  Medicaid is a health payment program for needy individuals.  In order to qualify for Medicaid, an individual must have very limited assets (less than $2,000) and must have insufficient income with which to pay for the cost of his care.

If a person resides in a nursing home and qualifies for Medicaid, Medicaid will pay for most of the costs associated with his care.  I say “most” because the Medicaid beneficiary has a cost share that he must pay.  The cost share comes from his income.

A Medicaid beneficiary must pay his income to the nursing home every month with certain exceptions.  This is the Medicaid beneficiary’s cost share.  The cost share reduces the amount of money that the Medicaid program pays to the nursing home.  It works as follows:

A private-pay nursing home resident pays, on average, $12,000 a month to the nursing home.  When a person qualifies for Medicaid, the Medicaid program pays the same nursing home for the same care about $6,500 per month.  (And, yes, a nursing home cannot discriminate against a Medicaid beneficiary and must provide him with the same level of care as if he were a privately paying resident.  From personal experience, I can tell you that nursing homes do not discriminate against Medicaid beneficiaries.)

The Medicaid beneficiary’s income reduces the amount Medicaid pays (about $6,500 per month) with certain exceptions.  Assume that Mr. Smith qualifies for Medicaid and that his monthly income is $2,500 per month from Social Security and a pension.  Let’s further assume that Mr. Smith has a wife who continues to reside at home and his health insurance costs him $200 a month.

Mrs. Smith may be able to retain up to $3,000 per month of Mr. Smith’s income.  The amount that Mrs. Smith can retain from Mr. Smith’s income is reduced by the amount of her income.  For instance, if Mrs. Smith has $1,800 in monthly income from Social Security and a pension, then the amount she can retain gets reduced by $1,800.  Let’s assume that Mrs. Smith can retain $1,000 of Mr. Smith’s income.

Let’s further assume that Mr. Smith has private health insurance and his monthly premium is $200.  The Medicaid program wants Mr. Smith to retain his health insurance because if Mr. Smith visits a doctor or is sent to the hospital from the nursing home, then Medicare (not Medicaid) and his private health insurance will probably foot most, if not all, of the bills associated with these types of visits.

So, in this example, Mr. Smith has monthly income of $2,500.  His monthly income is reduced by the $1,000 that Mrs. Smith gets to retain.  His monthly income is further reduced by the $200 monthly health insurance premium.  Mr. Smith now has $1,300 [$2,500 – ($200 + $1,000) = $1,300] of his income available.

The final reduction to Mr. Smith’s income is Mr. Smith’s personal needs allowance.  This is the amount of money that Mr. Smith can retain each month to pay for his own personal items for which the Medicaid program does not pay, such as clothing, haircuts, and entertainment.  For many years, the personal needs allowance for a nursing home resident in New Jersey was $35.  So, Mr. Smith could retain $35 a month from his income to pay for his haircuts, clothing, entertainment, and any other non-covered items he might need.

As of July 1, 2017, the person needs allowance was increased from $35 to $50.  Still not much, but as a percentage increase, it’s a 42% increase in the allowance.  Not bad.

Mr. Smith’s remaining income, $1,250 ($1,300 – $50 = $1,250) is payable to the nursing home.  This reduces the amount the Medicaid program pays the nursing home from $6,500 to $5,250 ($6,500 – $1,250 = $5,250).

Declaring an Estate Insolvent

When a person dies, the affairs of his estate must be wrapped up or administered.  This process is called estate administration.

The person who administers an estate is called the executor, if the person died with a Will, or an administrator, if the person who died did not have a Will.  The executor of an estate has several major duties—he must submit the Will to probate, gather up the assets of the estate, pay all the debts of the estate, file the appropriate tax returns, account to the beneficiaries of the estate, and distribute the assets of the estate to the beneficiaries of the estate.

Sometimes an estate has insufficient assets with which to pay all the debts of the decedent.  An estate with insufficient assets to pay its debts is said to be insolvent.

When an estate is insolvent, the executor must file an action in court to have the estate declared insolvent.  So, if you are named as the executor of an estate and if the estate has insufficient assets with which to pay its debts, then one of the first questions you might want to ask yourself is, Do you want to become the executor of the estate?

Handling an insolvent estate can be quite tricky.  As stated, you have to file an insolvency action.  The creditors of the estate will be contacting you and will be demanding payment.  You might try and negotiate with the creditors in order to reduce the debt.  In the end, though, some creditors might not get paid and the creditor might not understand why they aren’t being paid in full.

Even if you are named as executor in a Will, you do not have to accept the role of executor.  The nomination in the Will is simply that, a nomination.  You would not officially become the executor of the estate until such time as you submit the Will to probate before the appropriate surrogate of the county in which the decedent died domiciled and qualified as executor before the surrogate, which entails signing a few forms.

Until you are officially appointed as the executor of the estate, you are not the executor, so you have no duties or obligations to the estate.  On the other hand, once you qualify, you are the executor and you must faithfully performs the duties and obligation of the executor.  With an insolvent estate, that means paying the creditors in a certain manner.

If the decedent were married, you might ask yourself if the decedent’s surviving spouse is responsible for his debts.  The answer is, she is to the extent that the debt is a necessity, such as a medical expense that the decedent incurred during his life.  But the surviving spouse is only liable after the assets of the estate have been exhausted.  To that end, you are back to filing an insolvency action and paying those debts that you can pay with the assets of the estate.

An insolvency action is filed in the Superior Court of New Jersey.  You file the action no sooner than nine months after the death of the decedent, because creditors have nine months after the death to present their claims to the executor.  The action is filed with an accounting.

There is a certain order in which debts must be paid.  For instance, funeral expenses and expenses associated with the administration of the estate are paid first and second.  Debts with the same priority are paid proportionately if there are insufficient assets to pay all the debts within the same debt class.

At some point in time, a debt might not be paid at all or it may only get paid in part.  The court will enter an order approving a payment plan that the executor submits to the court. Once the court approves the payment plan, the executor can pay the creditors in the manner that the court has directed.  No other payments from the estate will be made, and the executor will released from any liability for not paying a debt of the estate.

Insolvent assets can be much harder to manage than solvent ones.  If you think an estate might have insufficient assets with which to pay its debts, you might want to think twice before qualifying as executor.