The Power To Trust

New Jersey recently implemented a significant change to its Medicaid program. Medicaid is a health insurance program for needy individuals. Unlike private health insurance policies, Medicaid will pay for long-term care costs, such as care in a nursing home, an assisted living residence, or at home, such as a home health aide.

Prior to the recent change, the Medicaid program that paid for care at home or in an assisted living residence had an income cap. If the applicant’s gross monthly income exceeded the cap, which is currently $2,199, then he could not qualify for Medicaid at home or in an assisted living residence, no matter how few assets the applicant had.

The State changed the Medicaid program to eliminate effectively the income cap for purposes of determining an applicant’s eligibility for Medicaid. If an applicant’s income exceeds the cap, then the applicant must place his excess income into a trust.

The trust is known as a Qualified Income Trust or Miller Trust. Essentially, the trust allows Medicaid to disregard the applicant’s income in assessing his eligibility for Medicaid benefits. After he is determined to be eligible for benefits, his income still must be paid over to the facility (the nursing home or assisted living residence) as his cost share, but for purposes of determining his eligibility for Medicaid benefits, the trust allows the State to disregard his income.

There are many issues that elder law attorneys (and I’m sure the general public) have with the mechanics of these trusts. One issue with respect to the mechanics of the trust is, Who can sign the trust for the Medicaid applicant?

Many applicants for Medicaid benefits do not have a level of mental capacity sufficient to govern their affairs; in short, many applicants for Medicaid are mentally incapacitated. The question then becomes, How does an individual who is mentally incapacitated establish a trust? A person who lacks mental capacity cannot sign a legal document such as a trust; he does not understand the nature of the transaction into which he is entering and cannot sign the document.

The State has put out a series of frequently asked questions and other helpful documents. In part, the State has said that an agent under a general power of attorney has the appropriate authority to sign a Qualified Income Trust.

In reviewing New Jersey’s power of attorney statutes, I believe that this statement is true. While a power of attorney agent cannot gift a principal’s agent without specific authority to gift in the power of attorney document, there is nothing in the power of attorney statutes that requires a specific grant of authority to sign a trust document.

But what if the Medicaid applicant did not sign a power of attorney and has a legal guardian appointed for him by the courts? For instance, assume that Mr. Smith’s son Robert is serving as Mr. Smith’s guardian. Can Robert sign the trust for Mr. Smith without further approval by the courts? Probably not.

There is a guardianship statute that confers unto our courts the ability to create revocable and irrevocable trusts for the property of the ward’s estate. Given this statute, many elder law attorneys believe that unless the court has specifically authorized a guardian to create a trust for the ward, then the guardian cannot create a trust for the ward.

What this means from a practical standpoint is that a guardian will probably have to petition the court to obtain authority to create a Qualified Income Trust for his ward. An agent under a general power of attorney will not, in most cases, need to obtain additional authority to create such a trust.

Better Safe than Sorry

When a person dies, their last will and testament can be admitted to probate. In order to submit a Will to probate, the executor nominated in the Will takes the Will to the surrogate’s office for the county in which the decedent died domiciled, along with an original death certificate for the decedent.

Most Wills contain a clause that says something to the effect of the following: I hereby appoint Joe Doe as executor of my Will. This clause is a nomination of Joe Doe to be the executor of the decedent’s estate. Joe is not officially the executor of the decedent’s estate until Joe submits the Will to probate before the surrogate.

The act of probating the Will is designed to prove the validity of the Will. The surrogate’s office reviews the Will and, assuming that the Will satisfies the formal requirements of a Will, admits the Will to probate. If the Will does not satisfy the requirements of a Will, then the surrogate will not admit the Will to probate. In cases such as these, the nominated executor will either need to forego the probate of the Will or appear before a judge and request that the Will be admitted to probate.

An executor admits a Will to probate in order to be appointed officially as executor. The most common reason an executor needs to be appointed as executor is so the executor can access the decedent’s assets.

For instance, without the paperwork from the surrogate, the executor cannot go down to the bank and access the decedent’s bank accounts. Without the paperwork from the surrogate, the executor cannot sell the decedent’s house or transfer title to the house to the beneficiaries of the estate. In short, the executor cannot accomplish any task on behalf of the estate without being appointed as executor.

Many Wills are never submitted to probate. For instance, Mr. Smith may die and Mrs. Smith may find that all their assets passed to her as the surviving joint tenant–their house, their bank accounts. Mr. Smith may have named Mrs. Smith as the beneficiary of his IRA, so Mrs. Smith doesn’t need to probate his Will in order to claim the IRA since she is the named beneficiary.

Nevertheless, it may be a wise idea to file a certified copy of the decedent’s Will with the surrogate’s office. In order to submit a Will to probate, the executor must pay the surrogate a fee of about $150. To record a certified copy of the Will with the surrogate’s office, without having the Will admitted to probate, costs about $50.

So, why might someone want to record a certified copy of the Will with the surrogate? Well, assume that Mr. Smith dies. Mrs. Smith believes that all of Mr. Smith’s assets passed to her and there is no reason to submit her husband’s Will to probate. Mrs. Smith, desirous of lightening the clutter around her house, throws out Mr. Smith’s Will, because she believes the Will no longer serves a purpose.

Five years later, Mrs. Smith dies. Mrs. Smith’s son, who is the executor of her estate, finds out that he needs to probate Mr. Smith’s name because of an issue with one of the assets–perhaps a bank account is still in Mr. Smith’s name or there is an issue with the couple’s home. Now, the son, who was the alternate executor nominated in Mr. Smith’s Will, does not have Mr. Smith’s Will because Mrs. Smith threw it out.

If a certified copy of the Will had been recorded with the surrogate, then that copy could be admitted to probate. For this reason, even if you think a Will serves no purpose, it might be advisable to record a certified copy of that Will with the surrogate’s office. It’s better to be safe than sorry.

Avoiding Death Tax

I often have clients ask me how they can save “death taxes” for their children when they die. For many clients the answer is simple–your estate is not subject to any death taxes.

Unlike most states, New Jersey has two death taxes that it may impose against a decedent’s estate. There is the New Jersey estate tax, which is a tax imposed if the gross value of the estate exceeds $675,000, and there is the New Jersey inheritance tax, which is a tax imposed against an estate if the beneficiaries of the estate are not closely related (spouse, children, grandchildren) to the decedent.

If your estate does not exceed $675,000 in value and if you are leaving your entire estate to close relatives, then your estate will not have to pay any death taxes.

For those individuals who are leaving part of their estate to a more distant relative (brother, cousin, nephew) or a friend, then there are few viable planning options to avoid the New Jersey inheritance tax. You could move to another state. You could leave your estate to someone or something else (for instance, a charity). Or, you could gift your money to your intended beneficiary, but even then you must live another three years before the gift would not be included in your estate for purposes of calculating the inheritance tax.

For those individuals whose estate exceeds $675,000, there are a few options available to reduce or eliminate the estate tax, but the primary planning technique involves married clients, not a single client. When I help a married couple, I am dealing with two people and each of those clients has a $675,000 credit exemption against the estate tax.

By placing trusts into each spouse’s last will and testament, I can preserve the $675,000 credit exemption of the first spouse to die. When the second spouse dies, she also has a $675,000 credit exemption. Using this relatively painless, simple technique, I can preserve each spouse’s credit exemption and sheltered $1,350,000 ($675,000 times two) from estate tax. This technique does not work for a single person.

For a single person and for married couples looking to shelter more than $1,350,000, the primary remaining option is to gift a portion of their assets; however, making gifts is not always the best solution. When you make a gift, the recipient of the gift receives your basis in the asset. So, for instance, if you purchased Exxon stock for $20 a share and it is now worth $90 a share and you gift that stock to a child, your child has a basis of $20 per share. When your child sells the stock, he will have to pay capital gains tax on $70 of each share’s sales price.

If you had left the stock to your child as an inheritance instead of as a gift, his basis in the stock would have been stepped up to $90 a share, and when he sold the stock, he wouldn’t have to pay any capital gains tax.

The rate of the New Jersey estate tax on the value of the estate in excess of $675,000 is about 10%, so for instance, a $1,000,000 estate would pay about $33,000 in estate tax. But, as noted, many of the decedent’s assets might receive a step up in basis (for instance, the decedent’s house, his stock accounts, etc.), so the savings in capital gains tax to his family might far outweigh the cost of the estate tax.

Furthermore, if you gift in excess of the annual exclusion amount (currently $14,000 per year, per person), the amount you gift over the annual exclusion amount reduces your $675,000 lifetime exemption. What I mean by this can best be explained by example. Assume Mr. Smith gifts $14,000 to his son in 2014 then passes away in 2015; Mr. Smith would die with a $675,000 exemption equivalent against New Jersey estate tax. Now assume that Mr. Smith gives his son his house worth $414,000 in 2014 then passes away in 2015. Mr. Smith will now die with a credit equivalent of $275,000 ($675,000 – $400,000 = $275,000).

Moreover, Mr. Smith’s son will receive Mr. Smith’s basis in the house instead of a stepped up basis. When the son sells the house, he’ll have to pay capital gains tax. Aggressively gifting could cost your family more in taxes than paying a little estate tax when you die.