Income-Only Trust Assessed Correctly

Recently, Meghan Davey, the Director of the New Jersey Division of Medical Assistance and Health Services, issued a final agency decision that correctly states the correct law governing irrevocable trusts. Ms. Davey’s decision is important, because the counties are beginning to interpret the law governing trusts in an incorrect manner.  County workers need proper guidance as to how to analyze trusts, so they don’t improperly deny applicants Medicaid benefits to which they are entitled.

Medicaid is a federal and state health payment plan for needy individuals. If a person qualifies for Medicaid benefits, Medicaid will pay for many of the costs associated with long-term care, such as care in a nursing homes or assisted living residences.

The cost of long-term care can be exceedingly high. While some might debate the morality of planning to qualify for a government “welfare” program, the fact of the matter is Medicaid planning is perfectly legal and permissible.  Numerous courts have stated that Medicaid planning is something in which most competent people can and do engage.

Over the years, I have assisted many people in qualifying for Medicaid. I know for a fact that some of my clients were individuals who staunchly align themselves with conservative political thinking; the type of thinking that abhors big-government with its government welfare programs.  Yet, when it came time for a family member to benefit from Medicaid and Medicaid planning, these otherwise fiscally conservative thinkers were lining up to qualify for Medicaid.

And there is nothing wrong with that. It is a shame that our country treats health care in such a cavalier manner, almost blaming people for needing care.  People age and with age, we diminish in our capabilities and require the assistance of others.  If you are fortunate to live into your 80’s and 90’s, you will find yourself in need of the assistance more than you needed the assistance of others when you were in your 20’s and 30’s.

Putting aside the morality of Medicaid planning and the politics of the Medicaid program, the fact of the matter is, Medicaid is a law, a very complex law. A great many statutes make up the Medicaid Act.

If you enter a nursing home and seek to qualify for Medicaid benefits, you will file your application for benefits with the county board of social services for the county in which you reside. The county will process your application and can either approve or deny the application.

If the county denies your application, you have the right to take a fair hearing of the denial. A fair hearing is an administrative appeal of the denial of your Medicaid benefits.  The first step in a fair hearing is a hearing before an administrative law judge.

Whether the judge rules in your favor or against you, the judge’s decision is reviewed and passed upon by the Director of the New Jersey Division of Medical Assistance and Health Services. The Director, Ms. Davey, makes a final agency decision.  Her decision is the final administrative decision in your case.  If you disagree with her decision, then you have to appeal to the Superior Court of New Jersey, Appellate Division.

In a recent case, Director Davey correctly analyzed an irrevocable trust that is commonly known as an “income-only trust.” The trust is established with the funds of the applicant, typically more than five years before the date any application for Medicaid benefits if filed.

The trust entitles the applicant to payment from the income the trust generates (interest and dividends), but no right to payments from the principal of the trust. For this reason, the trust is called an income-only trust.

In the recent case, the county denied the applicant benefits. The county took the position that any trust an applicant establishes with his own money is prohibited no matter how many years have passed since the trust was funded, but Director Davey correctly analyzed the trust as an irrevocable income-only trust, which only entitled the applicant to the income.

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.