Caregiver Agreements

As we age, we tend to need more care. Frequently, the provision of that care falls on our younger, healthier family members.

I recently had the son of a client come to see me. His parents are in their mid-90’s, and he is coordinating and tending to their care needs, which are substantial. He was telling me about a speech President Obama recently gave where the President had a 104 year old World War II veteran behind him; the President was praising the 104 year old veteran for his service and for achieving his advanced age. The son jokingly said to me, “What no one mentioned is that the 104 year’s son–who is 80 years old– is the one caring for his aged father.” The truly funny thing is, there’s probably a great deal of truth to that joke.

The adult children of elderly parents often spend a great deal of their time and effort caring for their parents. More than that, the children often spend their own money to provide for the needs of their parents. The children do these things out of love, and without question, their dedication is admirable.

In some cases, the care the parent needs simply gets to be too much for any person to handle in a home environment and the parent needs to begin residing in a nursing facility. Once in the nursing home, the parent will pay $9,000 to $12,000 a month until his funds are depleted, at which point in time he will likely qualify for Medicaid benefits.

All of the parent’s money will have gone to the nursing home, and his family will not receive any of his estate. This is not what the parent would have wanted. People want to leave something to their children. While they don’t want to “live off the government,” they also don’t want to leave this world with nothing to pass on to their family. Aside from the obvious financial benefits to the family, there are psychological benefits to a person when they feel that they are contributing to future generations of their family.

A recent New Jersey appellate case highlights the potential pitfalls with one Medicaid planning technique that some attorneys employ in order to enable an elderly client to preserve a portion of his estate for the benefit of his family. The technique is called a caregiver agreement.

Instead of having a child gratuitously provide care to an elderly parent, a caregiver agreement permits a parent to compensate a caregiver child for the care the child is providing to the parent. In the recent case, the court found that the caregiver agreement was invalid.

I always advise clients that if they are going to use a caregiver agreement, the agreement and the provision of the care must be arranged in a very coordinated and careful manner. I would only advise using this technique if you retain the services of a Certified Elder Law Attorney. There are so many things that a person could do wrong with these agreements, that I could not discuss the potential pitfalls in an article of this size.

But here’s an example. In this recent New Jersey appellate case, the care that was being provided to the elderly parent was, in part, being provided by a 12 year old grandchild. Now, having a 12 year old grandchild as a paid caregiver is so silly that I don’t think I even need to mention the problems with that situation.

A caregiver agreement may work to preserve assts for the family of an elderly, needy individual, but care must be employed in drafting the agreement and in documenting the care that is being provided.

Tax Planning for Married Couples

New Jersey is one of the few states in this country with its own estate tax. Fewer than twenty of the fifty states in the United States have an estate tax. The estate of a New Jersey resident is subject to estate tax if the value of the gross estate exceeds $675,000. (The federal government has an estate tax as well; the credit against the federal estate tax is $5,340,000.)

The gross estate includes all assets the individual owns, including the proceeds of life insurance. So, for instance, if Mr. Smith owns a home worth $300,000, cash of $100,000, and life insurance with a death benefit of $500,000, for a total of $900,000, his estate would be subject to the New Jersey estate tax.

The rate of tax of the New Jersey estate tax is roughly 10%. So, for instance, if a decedent’s estate is worth $1,000,000, his estate exceeds the $675,000 credit by $325,000 and would pay approximately $33,000 in estate tax.

When I meet with a married couple, each spouse comes to my office with a credit of $675,000 against the estate tax. There is no estate tax between spouses. So, if Mr. and Mrs. Smith have an estate worth $1,000,000, and Mr. Smith dies leaving his entire estate to Mrs. Smith, Mrs. Smith will not have to pay an estate tax; however, when Mrs. Smith dies, she will only have one $675,000 credit against the New Jersey estate tax. Her children will then have to pay $33,000 in estate tax on the $325,000 by which her estate exceeds the $675,000 credit.

If Mr. Smith were to leave his estate to someone or something other than his wife, he would use his $675,000 credit to the extent he passed his estate to a non-spouse beneficiary. For instance, if Mr. Smith devised $100,000 to his children, he would use $100,000 of his $675,000 credit.

The problem is, Mr. Smith probably wants to leave his entire estate to his wife, and Mr. Smith’s wife probably wants to receive Mr. Smith’s entire estate. While the couple ultimately wants to benefit their children, both Mr. and Mrs. Smith want to benefit each other first and foremost.

The solution I offer my clients, a solution that has existed for several decades, is a trust in each spouse’s last will and testament for the benefit of the surviving spouse. Because we have no idea which spouse will die first, we place a trust in each spouse’s Will. The surviving spouse is the primary beneficiary of the trust and can even be the trustee of the trust if the trust is drafted appropriately.

Essentially, when one spouse dies, the surviving spouse will be holding an inheritance that her spouse left her in a trust for her own benefit. This trust goes by many names—credit shelter trust, by-pass trust, A/B trust. Personally, I like to call it a credit shelter trust because that’s what the trust is doing—sheltering the credit of the first spouse to die.

So, assume that Mr. Smith dies leaving $500,000 to a trust in his Will for Mrs. Smith’s benefit. Mrs. Smith is the trustee of the trust. By doing this, Mr. Smith used $500,000 of his $675,000 credit against estate tax. Mrs. Smith can continue to use the money in the trust for the remainder of her life, and when she dies, the money that remains in the trust will pass to the Mr. and Mrs. Smith’s children. Mrs. Smith will also leave her estate to her children.

Instead of dying with an estate worth $1,000,000, Mrs. Smith dies with an estate worth $500,000. Since neither Mr. nor Mrs. Smith left more than $675,000 to someone (or something) other than his/her spouse, neither estate is subject to estate tax.

By employing a very simple trust that does not interfere at all with the surviving spouse’s life and finances, the couple saved $33,000 for their children.

Life Insurance

There are a number of issues with respect to the ownership of life insurance that I see time-and-time again with my clients.  As most of us know, life insurance is a type of insurance that insures the person’s life.

When the owner/insured dies, the life insurance company will pay a certain amount of money to a named beneficiary.  For instance, Mr. Smith purchases a $100,000 policy of life insurance naming his wife as the beneficiary of the life insurance policy.  When Mr. Smith dies, the life insurance company will pay $100,000 to Mr. Smith’s wife, the named beneficiary.

Life insurance is an excellent way to provide a safety net for those you support.  For instance, Mr. Smith probably has a job.  The money he earns working at his job supports his family.  If Mr. Smith were to die, the money he earns would disappear and his family would need a supplementary source of income.  Life insurance provides that supplementary source.

Personally, I think the value of life insurance deceases as the person ages.  To me, a seventy year old individual has a far lesser need for life insurance than a forty year old individual does.  In most instances, the forty year old has young children who depend upon his income and the seventy year old does not have a family to support.  His wife may need supplemental income if he were to die, but the need for life insurance is certainly diminished.

Most of my clients fail to realize that the proceeds of life insurance are included in their estate for federal and state estate tax purposes.  For instance, in New Jersey, an estate is subject to New Jersey estate tax if the value of the estate exceeds $675,000.  In calculating the $675,000 value, you need to take into consideration the proceeds from any life insurance that the decedent owned.

On the other hand, the proceeds of life insurance are not taken into consideration for purposes of the New Jersey inheritance tax, if the life insurance is payable to a named beneficiary.  So, for instance, if Joe dies with a $100,000 life insurance policy naming his nephew as the beneficiary of the life insurance policy, then the life insurance proceeds are not taxed for New Jersey inheritance tax purposes.

Finally, one issue I have seen with my own parents and the relatives of friends involves a low-benefit insurance policy that carries an extremely high premium.  For instance, my parents were sold policies of life insurance about 25 years ago that have a $12,000 death benefit.  When they first purchased the policies, the premiums were very low and my parents thought they were doing the right thing by buying a policy of insurance that would pay for their funerals.

Today, they pay about $2,000 a year in premium for these policies of insurance.  The insurance has little to no cash value, and they wonder whether they should cancel the policies or continue to pay.  When you are 89 years of age, you think “how much longer do I have?”

I know from friends that my parents are not the only people who bought policies of insurance such as this.  When you reach an advanced old age, whether to continue paying or not paying is debatable.  But if you are in your seventies, you may want to look at your life insurance policies and ask whether or not maintaining those policies is the right choice given the potential increase in premiums.