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.

How To Apply for Medicaid Benefits

Medicaid is a government health payment plan for needy individuals.  If a person qualifies for Medicaid, it will pay for many of the costs associated with long-term care.  Since long-term care can cost up to $14,000 a month in this area of the state, many people who never thought they would need to qualify for Medicaid do need to qualify when they require long-term care.

Applying for Medicaid benefits is a lot of work.  By law, the Medicaid Office is supposed to process an application for Medicaid benefits in forty-five days.  In practice, that almost never happens.

You file an application for Medicaid benefits with the board of social services serving the county in which the applicant resides.  For example, if your mom is in a nursing home in Monmouth County, then her application for Medicaid benefits would be filed with the Monmouth County Division of Social Services.  Monmouth County has offices in Freehold and Ocean Township at which the application can be filed.

In and of itself, the application is not that complicated.  You could probably complete the application in under one hour.  What makes the application process more complicated is the supporting materials the application requires.

The Medicaid Office will request five years’ worth of financial statements for every financial account the applicant owned in the five years preceding the date of application—every bank account, every brokerage account, every annuity.  Inevitably, these statements will cause the Medicaid Office to have questions about the applicant’s financial affairs during that five year period of time.  Primarily what the Medicaid office is concerned with is gifts that the applicant may have made.

Many elderly individuals gift assets to family members.  The applicant may have consciously made the gift or the applicant may have simply paid a bill that a family member owed.  All of these events are gifts, and gifts cause the applicant to be ineligible for Medicaid benefits for a period of time.

The Medicaid Office will also ask for personal documentation for the applicant—his birth certificate, his spouse’s death certificate, Social Security card, health insurance card, etc.  The Medicaid Office will also need to see a statement that shows his monthly income on a gross and net basis.  Any taxes that are being deducted from the applicant’s income will need to be stopped.

If the applicant’s gross income exceeds $2,205, then a portion of his income will need to be placed into a trust, called a qualified income trust.  The trust will need to be drafted and trustees will need to be named.  A bank account in the name of the trust will need to be established.

The application process could take four to six months to complete.  During that period of time, the Medicaid Office will inevitably have questions.  If the applicant fails to respond to any of the questions that the Medicaid Office asks, the application can be denied for lack of cooperation.

While the applicant might believe that the requests for information were irrelevant or overly burdensome, the fact of the matter is, appealing a denial for lack of cooperation is often a losing battle, so it is best to try your hardest to cooperate with the Medicaid Office’s request, no matter how irrelevant or burdensome you may believe the requests to be.

This may sound self-serving, but I believe it is always better to be represented by an attorney when filing an application for Medicaid benefits.  For applicants who reside in nursing homes and assisted living residences, in many cases, the applicant is simply paying all of his assets over to the nursing home.  He could either pay another month at the nursing home or pay for competent legal advice, either way the money is being spent, but by hiring an attorney, the family can have the peace of minding in knowing that the application is being handled in a proper manner.

One Lawyer’s Advocacy

Am I ineligible for Medicaid? Recently, the New Jersey Medicaid program issued a letter increasing the uncompensated asset transfer penalty divisor.  The penalty divisor figure is used to calculate the period of time an applicant for Medicaid benefits is ineligible for benefits when he makes an uncompensated asset transfer during the lookback period.

Medicaid is a federal and state health payment plan for needy individuals.  If an individual qualifies for Medicaid, the program will pay for many of the costs associated with long-term care, such as care in a nursing home or assisted living residence.

For this reason, many people come to me seeking to qualify for Medicaid benefits when a family member resides in a nursing home. In a great many cases, I can save the family tens of thousands of dollars and qualify the family member for Medicaid benefits sooner than they would have qualified without Medicaid planning.

Long-term care facilities cost a lot of money. A nursing home in this area costs anywhere from $9,500 to $14,000 a month.  An assisted living residence can cost anywhere from $5,000 to $10,000 a month.

In order to qualify for benefits, an individual must have a very limited amount of assets.  Some people believe they can simply give their assets away and qualify for benefits.

In order to punish individuals who seek to impoverish themselves artificially and qualify for benefits, the Medicaid program punishes applicants who give their money away in order to qualify for benefits.  The way Medicaid punishes an applicant who gives away assets is by making the applicant ineligible for benefits for a period of time.  The more money the applicant gave away, the longer he will be ineligible for Medicaid benefits.  Only transfers made within a certain time prior to applying for Medicaid benefits are punished.

The Medicaid program only punishes gifts that were made within five years of applying for benefits.  This is called the lookback period.  If the gift were made before the lookback period, then the gift cannot be punished.  For instance, if Mr. Smith gave away $1,000,000 six years before he applied for Medicaid benefits, the gift of $1,000,000 cannot be punished.

Medicaid assesses a penalty period by taking the aggregate of all gifts made during the five-year lookback period and dividing that figure by a divisor figure, which is currently $12,000.  In other words, if Mr. Smith gifted $144,000 in the past five years, Medicaid would take the $144,000 in gifts and divide that figure by $12,000.  The result of this division is 12.  Twelve is the number of months for which Mr. Smith would be ineligible for Medicaid benefits.

The $12,000 figure is based upon the statewide average cost of nursing home in the state of New Jersey.  That is the figure the State must use to calculate the penalty period.  For years, the State used an artificially low divisor figure, resulting in penalty periods that were inappropriately long.

Several years ago, I sued the state of New Jersey in federal court over the divisor figure.  As a result of that federal law suit, I was able to have the State enter a consent agreement with my client whereby the State agreed to survey annually the cost of all nursing homes in New Jersey and recalculate the divisor figure after conducting that survey.

The new $12,000 figure is a direct result of that settlement agreement.  The figure represents an accurate divisor figure, and a win for thousands of individuals across this state.  A direct result of my efforts on behalf of my client continues to pay off today for thousands of people.

What Is a Trust Protector

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.

Protecting Privacy Through a Revocable Living Trust

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.

Protecting Your Assets with a Trust

For years, I have been using irrevocable trusts to transfer a client’s assets to her children.  The benefits of transferring assets to a trust, instead of transferring the assets directly to the client’s children, are many.

To illustrate, let’s assume a hypothetical set of facts.  Mrs. Smith, aged 70, is interested in protecting her home from the ravages of long-term care costs.  She knows that if someday she needs nursing home care, she will have to spend all of her assets before she will be eligible for Medicaid benefits.  She is interested in removing her home from her name in order to protect the home from long-term care costs.

Mrs. Smith has four children.  She wants to transfer her home to her children, but she worries that a child might get sued or divorced or die and the impact such an event might have on her home.

If Mrs. Smith transfers her home directly to her children, her home would be exposed to any of children’s future problems.  For instance, if a child gets into a car accident and is sued, the child’s creditor could attach Mrs. Smith’s home.

If the spouse of a child files for divorce, the soon-to-be ex-spouse might try and lay claim to the child’s share of Mrs. Smith’s home.  While the claim of the ex-spouse for a share of mom’s house may not succeed, the frustration such a claim would cause to the child and Mrs. Smith can be substantial.

If a child dies, the child’s share of the home will, in all likelihood, pass to the child’s spouse.  Mrs. Smith would probably prefer that the child’s interest pass to the deceased child’s children, Mrs. Smith’s grandchildren, not the child’s spouse.

All of these issues can be avoided with a properly structured Medicaid trust.  Attorneys have been using Medicaid trusts for years, and the law governing these trusts is firmly established.

In 1993, a federal law was enacted detailing when the assets and income of a trust are available to a Medicaid applicant.  The test for availability is called the “any circumstances” test.  In short, if there are any circumstances under which the assets or income of the trust can be distributed to the Medicaid applicant, then those assets or that amount of income that can be distributed is available to the applicant.

The opposite of the “any circumstances” test is when the assets or income, or both, cannot under any circumstance be distributed to the Medicaid applicant.  If there are no circumstances under which the assets or income, or both, can be distributed to the applicant, then the assets or income are unavailable to the applicant.

When a person transfers her assets to an unavailable trust, the five-year lookback for asset transfers begins.  When Mrs. Smith comes to see me in order to protect her home, I tell her about the five-year lookback and the concept is that Mrs. Smith will not apply for benefits for five years following the transfer.

In 1993 and in 1998, the Centers for Medicare and Medicaid Services—the federal agency responsible for administering the Medicaid program, issued letters re-stating the law as I just presented it to you.  So, the fact that the law (passed in 1993) is now twenty-five years old and that the federal agency responsible for administering Medicaid said twenty-five and twenty years ago, respectively, that this is the law means that the state of New Jersey cannot claim that the law is something other than what I have presented to you.

I bring this up because from time-to-time, the State tries to make up its own rules, rules that are more stringent than the federal law permits.  But Medicaid is a cooperative federal-state program, and states that accept Medicaid funds, such as New Jersey, must comply with federal law.  If the State does not comply, it can be sued in federal court and when the law and the federal agency say the State’s position is wrong, it is wrong.

Senior Planning Can Be a Crime


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.

Planning in Changing in Times

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.

Reviewing Gift 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.

Beware Non-Attorney Medicaid Advisors

The New Jersey Division of Consumer Affairs has issued a bulletin advising New Jersey residents of a potential for abuse by non-attorney Medicaid advisors. Medicaid is a health payment plan for needy individuals.

In order to qualify for Medicaid, an individual must have limited assets and income that is insufficient to pay for his care.  Once qualified, Medicaid will pay for many of the costs associated with long-term care.

The cost of long-term care can be significant.  For instance, a nursing home can cost anywhere from $10,000 to $14,000 per month.  An assisted living residence can cost anywhere from $4,000 to $10,000 a month, with the mean being somewhere around $7,000.  A live-in home health aide can cost anywhere from $3,500 to $6,000 per month.

With costs such as these, it is no wonder that a great many people seek professional assistance in order to qualify for Medicaid benefits.  Once qualified, Medicaid may be for many of the aforementioned costs or, at least, assist with the payment of those costs.

Qualifying for Medicaid is no simple process.  Even an individual who is truly impoverished can have legal issues for which he would benefit from competent professional advice.  An individual with assets who is seeking to preserve a portion of his assets most certainly would require the assistance of an attorney in order to accomplish his goals of asset preservation and qualification for benefits.  This process of asset preservation and qualification for Medicaid is called Medicaid planning.

Elder law attorneys are frequently the attorneys who assist clients with Medicaid planning.  As an elder law attorney, I have assisted hundreds of people in qualifying for Medicaid.

Medicaid planning involves advising clients as to how to shelter their assets through direct gifts to family members or gifts to trusts.  An elder law attorney may also give advice regarding the drafting of a last will and testament, spending down assets, and converting countable assets to non-countable assets.

There are, however, non-attorneys who assist people in qualifying for Medicaid.  The Supreme Court of New Jersey has issued an opinion holding that providing Medicaid planning advice is the practice of law.  When a non-attorney is engaged to provide these types of services, the non-attorney is engaging in the unauthorized practice of law, which is a crime.

Now the New Jersey Division of Consumer Affairs has issued a bulletin warning the public about these practices by non-attorney Medicaid advisors.  The problem is, families are often referred to non-attorney Medicaid advisors by someone they believe to be knowledgeable about the Medicaid program.  For instance, a staff member of a nursing home might refer the family to the non-attorney Medicaid advisor.

As far as the family is concerned, they are doing the right thing; they are using the organization to which the nursing home where their mom resides referred them.  In reality, though, the family is being referred to a non-attorney who cannot, by law, engage in the work they are performing and who is providing inferior advice and counsel to the family.

Ironically, these non-attorney Medicaid advisors often charge the family what an attorney would have charged.  I have met several family members who have consulted with non-attorney Medicaid advisors, and I know the fees these non-attorneys have quoted my clients.  Their fees are often the same as my fee or, sometimes, more than my fee.

Family members who engage the services of a non-attorney Medicaid advisor are often getting inferior services at a high cost, both in fees and in lost opportunities.  So, beware, if the person giving you advice about Medicaid planning isn’t an attorney, then that person is committing a crime and probably is giving you bad advice.