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.

2017 Wrap Up

The death of the New Jersey estate tax will soon be upon us.  In 2017, the credit against New Jersey estate tax (technically called the credit equivalent exemption) rose from $675,000 to $2,000,000.  The credit had been $675,000 for many years prior to 2017.  What this means is, if a person died prior to 2017 with an estate worth less than $675,000, his estate paid no New Jersey estate tax.  In 2017, if an individual died with an estate worth less than $2,000,000, his estate paid no estate tax.

Effective January 1, 2018, there will be no New Jersey estate tax, irrespective of the value of the estate.  So, if a person dies with an estate worth $10,000,000 after January 1, 2018, his estate will not be subject to New Jersey estate tax.

For the time being, there will still be a federal estate tax.  The credit against federal estate tax is $5,490,000.  A married couple can easily shelter twice that amount, or approximately $11,000,000.  The current federal tax proposal that the Republican Party is pushing calls for a repeal of the federal estate tax.

Given the fact that most people have nowhere near five and half million dollars, the vast majority of New Jersey residents will not pay any estate tax after this year.  New Jersey will continue to have an inheritance tax.

The New Jersey inheritance tax is imposed primarily based upon the relationship of the beneficiary to the decedent.  A surviving spouse, child, grandchild, or other lineal descendants pay no inheritance tax.  A charity that is a beneficiary of an estate would pay no inheritance tax.  Other relatives and non-relatives, such as brothers/sisters, nieces/nephews, and friends, would pay an inheritance tax.

There is no state gift tax.  A person can give away an unlimited amount of money and the state of New Jersey will not impose a gift tax on the amount given away.  There remains a federal gift tax, however, the credit against the federal gift tax is the same as the credit against the federal estate tax, that is, $5,490,000.

What this means is—and contrary to popular misconception—a person would have to give more than $5,490,000 before he would ever pay a federal gift tax.       But I thought I could only gift $14,000 a year! The $14,000 “rule” is only half the story.  The full story is, you can only gift $14,000 a year to an unlimited number of people without reducing your $5,490,000 lifetime credit against federal gift tax.  So, if you don’t have $5,490,000, then don’t worry about federal gift tax.  The current Republican tax proposal does not call for an elimination of the gift tax.

The fact that there is no estate tax (or effectively no estate tax because most people have nowhere near the federal exemption amount) means that people are not as constricted as they were in the past when engaging in estate planning.  Most people simply do not need to consider estate tax issues when putting together an estate plan.

In my opinion, this—along with other changes in the laws governing trusts in New Jersey—opens up other planning opportunities for people.  Instead of worrying about estate tax, you should worry about how your estate is transferred to your children.

You should be thinking about things such as What would happen if my child is sued? What if my child gets divorced? and What if my child dies after me? What will happen to the inheritance I left my child in these situations? The solution may be a trust in your Will for the benefit of your child, a bloodline or dynasty trust.  Given recent changes in New Jersey trust law, your child could be the trustee of his trust and his inheritance would still be protected from his potential problems.