The State of New Jersey Death Taxes

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

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

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

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

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

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

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

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

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

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

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

Can a Penalty Period Be Tolled?

Can an uncompensated asset transfer penalty be tolled once it begins?  The director of New Jersey’s Medicaid program correctly agrees that it cannot.

Medicaid is a health payment plan for needy individuals.  If an individual qualifies for Medicaid, the program will pay for many of the costs of his care.

There are several different Medicaid programs, but primarily, Medicaid programs can be broken down into community Medicaid and institutional Medicaid.  Community Medicaid is essentially health insurance for a needy individual.  Institutional Medicaid is for an individual who requires long-term care services, such as a home health aide, an assisted living residence, or a nursing home.

In order to qualify for Medicaid, an individual must have insufficient income with which to pay for his care, and he must have a limited amount of assets, typically less than $2,000.  Certain assets, however, are exempt, such as a home in which an individual resides, an automobile, and certain small policies of life insurance.

Applications for Medicaid are filed with the county board of social services for the county in which the applicant resides.  So, if you live in a nursing home in Monmouth County, you file your application for Medicaid benefits with the Monmouth County Division of Social Services.  When an individual applies for institutional Medicaid, his finances are reviewed during the five years that preceded the date of his application for benefits.  This review is commonly known as the “five-year lookback.”  So, for instance, if Mr. Smith applies for Medicaid on April 1, 2018, then the County asks for financial statements for the applicant’s finances back to May 1, 2013.

If the applicant made any uncompensated asset transfers during the five-year lookback period, then he can be rendered ineligible for Medicaid benefits for an unlimited period of time.  The greater the value of the assets that the applicant transferred during the lookback period, the longer the period of ineligibility for Medicaid benefits.

A period of ineligibility for Medicaid benefits is known as a “penalty period.”  The penalty period is designed to render the applicant ineligible for Medicaid benefits for a period of time that is commensurate with the period of time for which the money he gave away could have paid.

In order to begin a penalty period, an applicant must be eligible for Medicaid benefits in all ways except for the fact that he made an uncompensated asset transfer during the lookback period.

About twelve years ago, the federal government issued guidance on the Medicaid program, specifically, how a penalty period begins and when it ends.  According to the federal government’s guidance, once a penalty period begins, it cannot be tolled.  So, if Mr. Smith applies for Medicaid and it is discovered that he gifted $150,000 within the five-year lookback period, then the County will assess a one year penalty against him.  Mr. Smith will be ineligible for institutional level Medicaid benefits for one year and will have to private pay for the cost of his care during that period of time.

No matter what Mr. Smith’s finances are after the penalty period is imposed, the penalty period cannot be stopped.  So, if Mr. Smith inherited money during that one-year penalty period, the penalty would continue to run.  At the end of the penalty period, Mr. Smith might be ineligible for Medicaid benefits because he now owns the inherited money, but the penalty period would have run and could not be imposed against him again for the $150,000 of transfers that he made during the lookback period.

Applying for Medicaid

Medicaid is a health payment plan for needy individuals.  In order to qualify for Medicaid benefits, an individual must have limited assets and insufficient income with which to pay for his care.  If an individual qualifies for Medicaid benefits, Medicaid will pay for most of the costs of his care.  For instance, if an individual is in a nursing home and qualifies for Medicaid benefits, Medicaid will pay for his nursing home care; the Medicaid beneficiary will only owe a portion of his income to the nursing home.

For almost twenty years, I have been helping people apply for Medicaid benefits. I am uncertain how many people I have assisted in apply for Medicaid benefits during that period of time, but it is a great many.

You apply for Medicaid benefits with the county board of social services in which the applicant for benefits resides.  If the applicant were in a nursing home in Monmouth County, then he would file an application for Medicaid benefits in Monmouth County, even if his home were in Middlesex County.  The county acts as an agent for the state of New Jersey.  The State contracts with the County to handle applications for Medicaid benefits.

When you file an application for Medicaid benefits, the County will ask the Medicaid applicant to sign various forms.  Some of those forms permit the County to verify the applicant’s income and assets.  The County has the right to contact banks and other financial institutions.  The County could, for instance, obtain statements and information about financial transactions that the applicant made.

The County, through its computer system, also has access to information about an applicant.  For instance, the County could verify the applicant’s Social Security income and date of birth.

Just because you file an application for Medicaid benefits, it does not mean that you will ultimately be approved for Medicaid benefits.  In fact, the system is set up in a way that seeks to deny an application for Medicaid benefits.

If people know anything about the laws governing the Medicaid program, they know something about the five year lookback period.  The five year lookback period is the five year period of time prior to the date on which the application for benefits is filed.  The County is entitled to look at financial transactions that the applicant made during the lookback period.  If the applicant made any uncompensated transfers during the lookback period, he can be determined to be ineligible for Medicaid benefits for a period of time without limit.  The more money that the applicant transferred during the lookback period, the longer the period of ineligibility will be.

If the application process were simply set up to approve your application, there would be no scrutinizing of the application’s finances for the past five years.  There would simply be a verification that your assets are currently limited and that your income is insufficient to pay for your care.  But that is not what the application process is about.  The application is primarily about the lookback period and about closely reviewing the financial transactions that the applicant made during the lookback period, with an eye toward denying the application for benefits if the applicant made any uncompensated transfers.

Some people believe that since the County has the authority to access the applicant’s financial information—based upon the authorizations an applicant signs when he files his application—that the County has the obligation to obtain any financial information it wishes to see.  In other words, some people believe that the County ultimately has the obligation to obtain the applicant’s bank statements and other verification documents, not the applicant.  But a recent cases tells us that this is not the case.  In this case, the court held that the applicant has the obligation to provide the verifications the county requests, not the County.  If the applicant fails to provide the information, the applicant can and will be denied benefits.

Nursing Home Myths

Loved ones are often quite confused when a family member requires nursing home care. For them, the event is both new and unique, and for them, it is.  But from a broader perspective, a person’s need for nursing home care and their entrance into a nursing home follow a very common pattern.  Knowing these patterns can prove helpful and will make you feel less adrift if you find yourself in this situation.

For many elderly individuals, the need for long-term care begins with a trip to the hospital, perhaps after a fall in their home. They will stay in the hospital for several days, then they will be discharged to a “rehabilitation center.”  The rehabilitation or rehab center is really a nursing home.  Technically it is called a sub-acute care facility.

Most nursing homes have both a rehabilitation section and a long-term custodial care section. The long-term section is what most people would call a nursing home, but if you didn’t know which section of the nursing home was which, you would be unable to distinguish the rehabilitation section from the custodial care section.

It is important to be discharged from the hospital to a nursing home where you might want your family member to stay if he requires long-term custodial care. Getting your foot into the door of the nursing home where you want your family member to stay is important.  Nursing homes want rehabilitation patients.  For the elderly and disabled, Medicare covers rehabilitation services.

Medicare’s reimbursement rate to nursing homes is quite good, so nursing homes like to take patients who require rehabilitation. Nursing homes also like to receive referrals from hospitals, so they are eager to accept referrals from hospitals for rehabilitative services.

After your family member has entered the nursing home for rehab, you may discover that your loved one does not have the ability to return home. The staff of the nursing home might tell you that you need to look for a long-term care facility that can care for your family member.  They might tell you that all of their Medicaid beds are full and that they have a waiting list for long term care beds.

Despite what the staff of the nursing home might tell you about “not having a Medicaid bed,” in New Jersey, most every bed in every nursing home is dual certified for Medicare and Medicaid coverage. This means that rehabilitation services will be covered (by Medicare) and custodial care could be covered (by Medicaid).

Once your family member enters the rehab center, he is already in a Medicaid bed, and the facility cannot discharge him for lack of a bed. Even if the bed weren’t Medicaid-certified, the nursing home, not the family, must find a facility that will accept the patient as a long-term resident, and the facility cannot discharge your family member until they find a facility that will accept him.  The facility tries to make this your burden, but the reality is, the burden is theirs, not yours.

Finally, the staff of the nursing home might tell you that if your family member is going to stay in their facility and if he is going to apply for Medicaid, then you have to use the company they recommend to help you apply for Medicaid benefits. The owners of these Medicaid application companies are often related in some manner to the owners of the nursing homes and are very loyal to the owners of the nursing homes.  The companies often charge more than an attorney would charge, yet the companies cannot provide the same level of services that an attorney can provide because there are certain services that constitute the practice of law and only attorneys can provide those services.  The truth is, you have the right to apply for Medicaid on your own or to hire whomever you wish to hire to help you file your application for Medicaid benefits.

Do You Have a Second?

In my practice, I deal extensively with agents—an individual with authority to act on behalf of another individual.  For me, the need to ensure that you have named an agent to handle all aspects of your affairs is so obvious that I forget most people don’t think in these terms.

The majority of people believe that they will always be able to handle their own affairs and that disabilities and death are the other guy’s problem.  Unfortunately, none of us can escape death.  And if we are fortunate to live long enough, there will likely come a point in time when we need the assistance of others because of some level of disability.  The fact of the matter is, if you are fortunate enough to live into your eighties or nineties, you will likely need some help from family or friends to handle your affairs.

So, naming someone else to assist you in various aspects of your life, and death, is a good idea.  The common documents used to name someone as your “agent” is a power of attorney, an advanced health care directive, and a last will and testament.  Powers of attorney and advanced health care directives enable someone else to make decisions for you while you are alive.  Through a last will and testament, you nominate someone else, called an executor, to handle your affairs after your death.  In addition, in a Will you can nominate a trustee to handle the assets you leave to the beneficiaries of your estate, typically if the beneficiary requires assistance in handling her own affairs, for instance, the beneficiary might be a minor.

When I speak to clients, I sometimes get the impression that the client doesn’t accept the fact that someday he might be disabled and unable to handle his own affairs.  In fact, some times when I speak with clients, I get the impression that they don’t accept the fact that someday they will die and someone else will need to handle their financial affairs for the benefit of the beneficiaries of their estate.

Naming an agent can be one of the most important decisions you make.  It ensures that your affairs can be handled in the event you cannot and it ensures that your affairs are being handled by the person you chose to make those decisions.

Most married people believe that their spouse can simply make decisions for them in the event they cannot.  So it may come as a surprise to learn that unless you name your spouse as your power of attorney agent, she could not make any financial decision for you simply because she is your spouse.  For instance, assume that Mr. Smith suffers a stroke.  Mr. Smith owns his house jointly with his wife and owns a 401(k) in his name alone.  He also owns several bank accounts jointly with his wife.

Mrs. Smith could access the joint bank accounts without a power of attorney, but without a power of attorney, Mrs. Smith would not be able to access any of the funds in Mr. Smith’s 401(k).  Mrs. Smith would not be able to mortgage or sell the house she owns jointly with Mr. Smith unless she as a power of attorney for him.

Without an advanced health care directive, Mrs. Smith may have difficulty accessing Mr. Smith’s health care information.  Mr. Smith’s health insurance company may not speak with Mrs. Smith.  The Health Insurance Portability and Accountability Act, commonly known as HIPAA, prevents health care providers and insurance companies from sharing your health care information with anyone except your designated health care personal representative.

Assuming Mr. Smith passes away, Mrs. Smith could not serve as Mr. Smith’s executor unless Mr. Smith executed a Will naming Mrs. Smith as the executor of his estate.  And while Mrs. Smith would likely be able to be appointed as the administrator of Mr. Smith’s estate—a role that is similar to that of an executor—she might be required to post a probate bond, which would cost the estate money.  Having a good plan in place is simply and costs much less than you think.  Putting that plan in place when you are healthy is a great idea.

Tolling a Penalty Period for Medicaid

A colleague of mine recently had a victory for individuals applying for Medicaid that bears mentioning.  Medicaid is a health payment plan for needy individuals.  Medicaid is a federal and state program.  The federal government pays for, at least, 50% of the costs associated with Medicaid.  In order to participate in the Medicaid program, a state must agree to be bound by the federal rules governing the program.

In order to qualify for Medicaid, an individual must have limited resources (typically less than $2,000) and income that is insufficient to pay for the cost of his care. In other words, if Mr. Smith lives in a nursing home and owns $1,000 in assets and has monthly income of $1,500, then he could qualify for Medicaid because the cost of his care is probably in the neighbor of $12,000 a month; accordingly, his income and assets are insufficient to pay for the cost of his care.  (If Mr. Smith had monthly income of $13,000 and his care cost $12,000, he would not qualify for Medicaid, but few people have income that high).

If an individual makes an uncompensated asset transfer within the five year period of time prior to applying for Medicaid, then he can be penalized for having made the transfer.  The five-year period of time is commonly known as the “lookback period.”  The lookback period is the only period of time that the Medicaid office can look at to see if the applicant made uncompensated asset transfers.

The manner in which Medicaid penalizes an applicant who has made an uncompensated transfer during the lookback period is by making the applicant ineligible for Medicaid for a period of time commensurate with the period of time the money transferred could have paid for his care.  In short, for every $12,700 (approximate) that an applicant gives away during the lookback period, the applicant is ineligible for Medicaid for one month.  The $12,700 figure is derived from the average cost of care in a nursing home in New Jersey.  Essentially, what the government is saying with the penalty period is, “If you hadn’t given away that $12,700, you could have paid for your care in a nursing home for one month, so we are going to make you ineligible for Medicaid for one month.”

Although the state can only look at financial transactions that the applicant made during the lookback period, the penalty period can be unlimited in duration.  So, for instance, if Mr. Smith gave away $1,000,000 three years prior to applying for Medicaid benefits, he would be rendered ineligible for Medicaid for months 78 months, which is $1,000,000/12,700  = 78.

Once a penalty period begins, it cannot be tolled. In other words, once the state imposes a penalty period, the penalty period does not stop running even if the financial circumstances of the applicant change.  The federal government has told the various states this fact, so since the states must abide by the federal rules governing the program, the states, including New Jersey, must abide by this rule.

Recently, a county attempted to stop an imposed penalty period claiming that after the penalty period was imposed, the applicant’s income rose to a level that made him ineligible for Medicaid for several months. The county attempted to stop the penalty period from running during the months the applicant received a higher level of income

An administrative law judge ruled that because the federal government does not permit penalty periods to be tolled, the county could not toll the penalty period. This is the correct result because this is what the federal law on the issue states.

An Ounce of Authority

One of my father’s favorite sayings is, “They have an ounce of authority.”  What the saying encompasses is individuals who are relatively low-level employees but who have a sufficient amount of authority to stand in the way of what you are attempting to achieve.  In my practice of law, the “ounce of authority” concept has become one of my favored ways of summarizing the issue with which a client is presented.

A client might come to me and ask how they go about administering a deceased family member’s estate.  With most estates, the administration of the estate is fairly straightforward.  The problem is, life is not always as simply as it should be.

I have personally administered a large number of estates, either serving in the role of guardian for an incapacitated person or the executor/administrator of a deceased person’s estate.  In the course of my serving in these roles, I have visited numerous banks attempting to accomplish some goal—closing an account, opening an account, attempting to find values of accounts.  I have dealt with many bank employees.

Based upon my experiences, before I go to a bank, I tell myself that what I am trying to accomplish might take several trips to the bank.  This is my way of bracing myself for the inevitable roadblocks that will be thrown in my way.  Ironically, when you enter many banks, a greeter will ask, “How my I help you today?”

I’m never quite sure why they ask this question, because the minute you begin to ask them for help, they throw up roadblocks.  As someone who knows a good amount about the law governing estates, I am often familiar with the issues the bank employee is raising, and I typically have documents with me that can overcome their questions or objections.  But just because you are right and just because you have the proper documents with you, doesn’t mean you are going to be able to accomplish the things you need to accomplish.

This is the “ounce of authority” dilemma.  It doesn’t matter if you are right, what matters is the person who has the authority believes you are right, and in order to get to that point, the person frequently needs to work the issue out in their own head.

For instance, I recently went to the bank to close out a small account titled in the name of a decedent.  I am the administrator of the decedent’s estate.  I had all the proper paperwork.  This was my third trip to the same bank attempting to close out this account.  I had provided the paperwork showing I was the administrator of the estate to the bank many months prior to my recent visit.  The bank statements for the account had been coming to my office for months.

It took me an hour at the bank to close out the account.  Several times, the bank employee questioned whether I had the proper paperwork.  The paperwork had to be faxed to the estate department of the bank and the bank’s manager had to be consulted multiple times.  After an hour, I left the bank with the promise that a check would be mailed to my office closing the account.  I still have not received the check.

As I sat there, I simply allowed the bank employees to work the issues out amongst themselves.  They would frequently make misstatements of law, but I simply sat there and waited for them to resolve the conflicts they had.  In my numerous dealing with banks, I have learned that if I attempt to correct them, they only view my assistance with skepticism, sometimes seeking to correct what I say with their own incorrect statements of the law.

I often wonder what my clients would be thinking in situations such as these.  I may have told the client the proper way to accomplish a goal, but I cannot account for the misconceptions of the law other people harbor, people with an ounce of authority.  And the problem for me is, the ounce of authority person is standing in the way of my client, so my client thinks my advice is incorrect because they can’t accomplish the thing they want to accomplish.  My point is, as with all things in life, being right doesn’t always mean you get what you want.  You have to keep trying and persevere.

 

Time To Review Your Estate Planning Documents

Recently, I wrote about the changes to the estate tax laws, both federal and New Jersey estate tax.  The upshot of my article was, unless you are worth more than $11,200,000, you don’t have to worry about the estate tax.  I also mentioned that the implication for the gift tax—and there is only a federal gift tax, there is no New Jersey gift tax—was the same.  Unless you are worth more than $11,200,000, you don’t have to worry about gift tax.

Having said that, I know that no matter how many times I say it, people will continue to worry about the estate tax and the gift tax.  For some reason, people worry about these taxes, even though, for years, these taxes haven’t affected the majority of Americans.  And when I say the majority of Americans, I mean all but the richest 1% or fewer.  Now, with the recent changes that have occurred in the laws governing estate and gift tax, it is even more unlikely that any of you will ever be affected by these taxes.  Unless, of course, you are worth more than $11,200,000.

“I thought I could only gift $15,000 a year?”  You will ask.  To which I always tell people that is only half the legal concept.  The full statement is–A person can gift $15,000 each and every year to an unlimited number of people without reducing his $11,200,000 lifetime credit exemption equivalent against gift tax.  If you gift more than $15,000 in a given year, then your lifetime exemption equivalent is reduced.  For example, if you gifted $16,000 to your son, then your lifetime exemption equivalent would be reduced from $11,200,000 to $11,199,000.  Technically, if you gift more than $15,000, you have to file a gift tax return, but no tax is owed and the return would take hardly any time to prepare and file.

Given the extremely high exemption equivalent against estate and gift tax—so high that it is safer to say there is no estate and gift tax than to say there is such a tax—what are the implications for you?  For one, stop worrying about estate and gift tax.  As stated, it’s safer to assume that there is no estate and gift tax.

Before the credit against the estate tax went to its presently lofty height of $11,200,000 and before the New Jersey estate tax was repealed (the credit against New Jersey estate tax was $675,000 for many years), a number of people implemented planning techniques to address the federal or New Jersey estate taxes.  Many of my clients drafted trusts into their Wills commonly known as credit shelter trusts to address the estate tax, particularly the New Jersey estate tax.

If you implemented planning techniques into your estate plan—such as credit shelter trust in your Wills—then I’d recommend you have your estate plan reviewed.  You may be able to eliminate these planning techniques and have a much more simple Will.

For instance, three years ago, if your estate were worth more than $675,000, your attorney might have suggested planning techniques to address the New Jersey estate tax.  These techniques, while not harmful, are more complicated than need be given your current situation, unless you are worth more than $11,200,000.

Now, there may be other reasons for you to have a trust as part of your estate plan.  In fact, recent changes in New Jersey’s trust laws have me recommending trusts to clients for various reasons; however, these reasons have nothing to do with estate or gift tax. For instance, a person might want to have a trust in his Will to ensure that his assets pass to his blood relatives, not to an in-law.  In my opinion the elimination of the estate tax offers up planning opportunities for clients, because a person’s estate plan doesn’t need to be weighted down and burdened with planning for the estate tax.

 

The Estate and Gift Tax Are Dead!

For years, I have been writing about the federal estate and federal gift tax, and my message has been fairly consistent—Most people don’t have to worry about these taxes. Until recently, a good number of people had to worry about New Jersey’s estate tax.  (New Jersey does not impose a gift tax.)  But with recent changes in the laws governing New Jersey’s estate tax and even more recent changes to the federal estate and gift tax, I think it is finally safe to say the estate and gift tax are dead.

At the beginning of 2017, New Jersey changed its estate tax laws.  The exemption equivalent amount against the estate tax was increased for the year 2017 from a paltry exemption amount of $675,000 to a more robust amount of $2,000,000.  This meant that if you died in 2017, the value of your estate would have to exceed $2,000,000 before your estate had a chance of paying New Jersey estate tax.

With the ringing in of the New Year, New Jersey’s estate tax is now completely repealed.  In short, there is no New Jersey estate tax, irrespective of the value of your estate.  New Jersey continues to have an inheritance tax, but the inheritance tax is only imposed if you leave a portion of your estate to someone other than a spouse, parent, child, grandchild or other lineal descendant.

Recently, as part of the federal reform of the tax code, the exemption equivalents against federal estate and gift taxes were doubled.  In addition, the exemption amounts have been indexed for inflation for many years, so the New Year brought an inflationary increase to the exemption equivalent.

Without the recent change in the tax code, the lifetime exemption equivalent against federal estate tax increased to $5,600,000 for an individual and $11,200,000 for a couple.  With the doubling of these exemptions under the new tax law, a single person would now have to have an estate in excess of $11,200,000 before his estate would pay estate tax.  A couple would have to die with more than $22,400,000 before their estate would pay estate tax.

In plain English, what this means is, if you are single and if you are worth less than $11,200,000 (hint:  This would be just about every United States citizen except for about .1%), then there is no chance your estate will pay federal estate tax.  And since there is no New Jersey estate tax, this means that if your estate is worth less than $11,200,000, your estate will not pay any estate tax.

If you are a married couple, you can easily shelter $22,400,000, assuming the $11,200,000 exemption is insufficient to cover your vast estate.  A federal estate return would need to be filed after the death of the first spouse and the surviving spouse would merely have to check a box to preserve the deceased spouse’s $11,200,000 exemption.

What about gift tax?  There is no New Jersey gift tax.  There is a federal gift tax.  The annual exclusion amount against the gift tax increased from $14,000 to $15,000 for 2018, but the annual exclusion amount is only half the story.

People often come to me and say something such as, “I thought I could only give $14,000 a year.”  The truth is, you can give any amount of money that you like.  The first $15,000 (for 2018) qualifies as an annual exclusion gift.  This means that if you gift no more than $15,000, your lifetime exemption against gift tax, which is now $11,200,000, will not be reduced.

If you gifted $16,000, then your lifetime exemption would be reduced to $11,199,000.  At a minimum, you would have to gift more than $11,200,000 before you ever would pay gift tax.  If you don’t have more than $11,200,000, then I wouldn’t worry about gift tax.  So, yes, technically, there still is a federal gift and estate tax, but if you are worth less than $11,200,000, neither tax affects you.

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.