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.

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.