The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 exempts from federal estate tax the first $5 million of a decedent’s taxable estate. In 2012, inflation adjustments increased the exemption to $5,120,000. However, the exemption is scheduled to drop to $1 million after 2012 unless Congress intervenes.

Because each decedent has his/her own exemption, couples can leave twice the individual exemption (i.e. $10 million if the individual exemption is $5 million) to children or other beneficiaries without federal estate tax. However, the exemption of the spouse who dies first typically will be wasted without careful tax planning. To take advantage of both spouses’ federal estate tax exemptions, couples can leave the first spouse’s exemption to persons other than the surviving spouse or a trust that isn’t includible in the surviving spouse’s estate (often called a credit shelter trust). Credit shelter trusts are a popular estate planning technique because they can save state as well as federal estate tax and serve as a rainy day fund for a surviving spouse. Still, some couples prefer to leave amounts to the surviving spouse outright.

Until the 2010 tax act, amounts left to a surviving spouse outright would forfeit the first spouse’s exemption. After the 2010 act, the unused federal estate tax exemption of the spouse who dies first may be used by the surviving spouse provided portability applies. For instance if a husband dying in 2011 leaves a $4 million estate and his wife dies with a $7 million estate at a time when the federal estate tax exemption is $5 million, the wife’s estate would pay tax on $2 million without portability but only $1 million if portability applies.

Portability is available to a surviving spouse only if the estate of the spouse who dies first elects it on a properly filed federal estate tax return. Estate tax returns are due nine months from the date of death but an extension can be taken to extend the filing date an additional six months. IRS has granted estates of decedents who died during the first six months of 2011 an extension to elect portability provided the estate files IRS Form 4768 requesting an extension no later than fifteen months after the decedent’s date of death.

Portability can save substantial potential federal estate tax when the second spouse dies. Therefore, it usually will be desirable for the estate of a first spouse to die to elect portability. However, this would entail the expense to prepare and file a federal estate tax return, which may not be required otherwise.

While portability is beneficial for sure, it isn’t a panacea. For instance, portability won’t save state estate tax unless so provided in state law. Thus, a portability election may reduce potential federal estate tax when a second spouse dies but as of this writing it won’t protect against New Jersey estate tax. To minimize New Jersey estate tax as well as federal estate tax, couples should execute credit shelter trust wills while both are able and elect portability when the first spouse dies. In addition, most people should have powers of attorney and health care advance directives to avoid the need for guardianship down the road. Once the first spouse dies, it is too late to engage in credit shelter trust will planning.

Estate tax planning is complicated, and one size fits all estate plans rarely serve users well. At FriedmanLaw, we seek to develop effective estate plans to meet your non-tax goals and reduce potential tax. Contact us if you’d like to discuss your particular situation.

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There is no easy answer to this deceptively simple question. Like other insurance, long term care insurance (“LTCI”) comes with many options and can prove surprisingly complex. For instance, many consumers are uncertain what their LTCI does and doesn’t cover.

First, it’s important to understand that medical insurance rarely covers long term care, and LTCI doesn’t cover routine medical costs. Thus, while Medicare may pay for preventive care and to treat illnesses, it won’t cover long term care in a nursing home or other setting. Neither will most employee and other health insurance. Therefore, if you need long term care, you must look to private resources, Medicaid, or LTCI.

Medicaid’s coverage and availability of facilities varies widely from state to state. In addition, choices of care settings and amenities can be more limited for Medicaid patients than for individuals with quality LTCI. Articles http://specialneedsnj.com/articles.php and Q&As http://specialneedsnj.com/elder_law.php throughout SpecialNeedsNJ.com, further explain Medicaid eligibility requirements and planning options. FriedmanLaw frequently helps families qualify for Medicaid without exhausting life savings.

Second, you should recognize that LTCI only covers care within the policy terms. LTCI usually pays a fixed daily benefit for a limited period of time after the insured has been unable to care for him/herself for a set period of time. Once the insured satisfies the elimination period, LTCI pays the daily rate toward long term care costs. For instance, LTCI with a $100 daily benefit and 90 day elimination period would pay up to $100 per day for long term care once the insured has met the policy’s benefit criteria (typically needing assistance with enumerated activities of daily living) for 90 days. The greater the daily benefit and maximum benefit term and the shorter the elimination period, the greater the LTCI premium. However with New Jersey nursing homes often charging over $10,000 per month, LTCI will be of little use unless it is sufficient to cover monthly LTCI costs less Social Security and other available private funds.

LTCI boosters tout the peace of mind that can come with knowing your care costs should be covered. But, the operative word is “should” because depending on the policy, LTCI can be very broad or fraught with limitations. Generally, when purchasing LTCI from a quality insurer, you get what you pay for. In other words broader coverage typically leads to higher prices and policies with low ball premiums probably won’t meet your needs. LTCI premiums vary with age, sex, health, and policy options.

LTCI usually can’t be purchased once an individual needs long term care and LTCI premiums are more manageable if you buy your insurance while younger. Therefore, you may want to consider buying LTCI while in your fifties or sixties instead of waiting until your seventies.

LTCI comes in many flavors, all of which impact benefits and costs. For instance, LTCI may be available with compound inflation protection, simple inflation protection, or no inflation protection. Compound protection is worth more and costs more than simple cost of living increases, but the benefit may be very valuable for younger purchasers. Thus, some consumers may do well to trade a longer elimination period for greater inflation protection. Other options may combine life insurance with LTCI, provide refundable premiums, or integrate husband and wife coverage.

When comparing LTCI options, your top concerns should be to understand the coverages and limitations offered by each policy; whether, when, and why premium can rise; whether the insurer is sound; and the insurer’s reputation for paying or denying reasonable claims. Finally, you also may want to consider a public/private partnership LTCI policy. [See “Public-Private Long Term Care Insurance Medicaid Program Protects Savings & Funds Long Term Care” at http://specialneedsnj.com/article.php?id=26]

Because LTCI can be so complex, professional advice can be crucial. FriedmanLaw has helped many families unravel the complexities of LTCI.

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When a Medicaid recipient passes away, the state can recover Medicaid expenditures from the individual’s probate estate and perhaps from other assets in which the individual once had an interest. As explained in greater detail throughout SpecialNeedsNJ.com, individuals may employ various planning techniques to preserve savings and qualify for Medicid to fund long term care. For instance changing a will or title to a home and other assets may shelter assets against Medicaid estate recovery.

An unusual story in the December 26, 2011 Eagle Tribune of North Andover, Massachusettes illustrates how expensive estate recovery can be. Massachusettes courts ruled that close to $200,000 found in a safe on a vacant lot could be taken to repay Medicaid provided to the safe’s former owner. While the state may be more deserving of this money than potential claimants, like the person who dumped the safe in the lot, it seems a shame that the owner’s relatives lost so much money to Medicaid. Perhaps the moral of this story is that consulting an elder law attorney early regarding options to fund long term care may permit families to protect substantial savings and still obtain quality long term care.

Will settling your personal injury or worker compensation claim cost you your Medicare? It shouldn’t, but it easily could if you and your personal injury lawyer don’t protect Medicare’s rights.

Generally, Medicare coverage is secondary to others who may have responsibility for your health care costs. Therefore, when settling nearly all personal injury and worker compensation claims, Medicare expects Medicare participants to repay Medicare’s pre-settlement expenditures for accident related care and spend damages that compensate for post-accident care costs incurred after settlement (“Future Medicals) on Future Medicals rather than submit claims for Future Medicals to Medicare. You must protect Medicare’s secondary payer interests if you are on Medicare when your claim settles or reasonably should expect to get Medicare within the 30 months following settlement for reasons such as having reached age 62.5, applied for Social Security Disability benefits (even if denied by an appeal is anticipated), or contracted end stage renal disease

Why should you care? Failing to protect Medicare’s rights can forfeit your own Medicare! What if you need costly surgery due to your accident, Medicare says you must pay for Future Medicals, but you’ve already spent your entire settlement? To make matters worse, Medicare may require you to spend more on Future Medicals going forward than they would if you’d made a good faith effort to protect Medicare’s secondary payer rights when settling your case.

What should you do? Medicare prefers you set aside Future Medicals damages in a Medicare Set-aside Arrangement (“MSA”). An MSA is a share of your damages that is calculated to cover Future Medicals for the rest of your life expectancy and is set aside solely to pay for Future Medicals. The appropriate amount to place in an MSA is based on Medicare guidelines and your post-accident medical records. However, an MSA satisfies your obligations to Medicare only if limited to paying for Future Medicals at rates acceptable to Medicare. Professional administrators can help meet these requirements. If the MSA is funded and administered in accordance with Medicare requirements, Medicare will pay for any Future Medicals that arise after the MSA is exhausted. If your actual Future Medicals turn out to be less than anticipated, the excess can pass to your beneficiaries.

FriedmanLaw can work with you and your personal injury or worker compensation lawyers to design a cost effective MSA that avoids interruption of your Medicare coverage. Contact us today at 908-704-1900.

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In recent months, many have protested the gap between the wealthiest one percent of Americans and the rest of us, but what about the health care gap? A new study sponsored by the United States Department of Health and Human Services reports that only one percent of patients account for over twenty percent of health care expenditures and five percent of Americans run up almost half our medical expenses. This top five percent group averages around $36,000 in doctor bills annually compared to an average of only about $230 per year for the bottom half of medical consumers. Study authors Stephen B. Cohen, PhD, and William Yu, said: “In both 2008 and 2009, five percent of the population accounted for nearly 50 percent of healthcare expenditures, with a mean expenditure of nearly $36,000.” This disparity in health care expenditures is thought provoking and may help focus the health care debate in the United States if we can resist the kind of hyperbole and hysteria that accompanied enactment of 2010′s Patient Protection and Affordable Care Act.

Of course, health care usage is heavily skewed by age, and it should surprise no one that older Americans incur far greater health care costs on average than do their children and grandchildren. While young people may prefer not to pay taxes to care for their elders, age warfare is not in anyone’s best interests. Even a newly minted college graduate will turn old someday and may need to access the social safety net of Medicare, Medicaid and other government health care programs. Cohen, S. and Yu, W. The Concentration and Persistence in the Level of Health
Expenditures over Time: Estimates for the U.S. Population, 2008–2009. Statistical Brief #354. January 2012 is available at the website of the Agency for Healthcare Research and Quality, Rockville, MD is available in its entirety at the following URL:

http://www.meps.ahrq.gov/mepsweb/data_files/publications/st354/stat354.pdf

In our June 21, 2011 SpecialNeedsNJ.com/blog entry, we noted that 1971′s, Younger v. Harris, 401 U.S. 37 (1971) United States Supreme Court decision generally requires federal courts to abstain from certain cases that implicate important state concerns, but a case then pending in the United States Court of Appeals for the Eighth Circuit would test whether the Younger doctrine precludes federal courts from considering Medicaid appeals.

Last month, the Eighth Circuit ruled in Hudson v. Campbell (8th Cir., No. 10–3025, Dec. 15, 2011) that United States District Court should not consider a Medicaid applicant’s appeal from Medicaid denial where the applicant goes directly to federal court without going through Medicaid’s fair hearing process. Applying the Younger doctrine, the Eighth Circuit held that abstention is appropriate where the Medicaid applicant hasn’t exhausted her administrative remedies because the state has an important interest in administering Medicaid. The Medicaid applicant’s attorney, Nathan Forck maintains that the Eighth Circuit ruling conflicts with a ruling in a United States Court of Appeals for the Tenth Circuit case involving similar circumstances. Thus, the issue eventually may end up at the Supreme Court. The Medicaid applicant’s initial brief can be accessed at http://tinyurl.com/Hudson-Brief while the applicant’s reply to the Medicaid agency’s brief is available at http://tinyurl.com/Hudson-Reply-Brief

Further information on this and other subjects is available throughout SpecialNeedsNJ.com. To subscribe to our frequent blog updatres, click on “entries RSS” in the Meta box to the left and then click on “subscribe to this feed.”

In our mobile society, people often vacation and even retire outside the United States. U.S. citizens and permanent residents generally are eligible for Medicare at age 65 provided the individual or spouse has worked at least ten years in employment subject to Social Security payroll tax. Medicare also is available to some younger people with serious disabilities or renal failure.

Medicare comes in two flavors. Original Medicare is a traditional health insurance indemnity plan with deductibles and percentage co-payments while Medicare Advantage plans are managed care plans that may require referrals and limit care to networks. Medicare covers certain pharmaceuticals under separate optional plans that can be combined with Original Medicare or a Medicare Advantage plan or included within a Medicare Advantage plan While all Medicare plans provide comprehensive health care within the United States, what if you get sick outside the country?

Original Medicare doesn’t cover care outside the United States other than medical costs on a cruise ship in or near a United States port and very limited hospital costs while traveling through Canada to or from Alaska, where a foreign hospital is closer to a home in the United States than domestic hospitals, or when a medical emergency arises in the United States and a foreign hospital is closer than any domestic hospital. Medicare doesn’t cover drugs purchased outside the country, and except for limited emergencies, Medicare doesn’t even cover dialysis outside the United States.

While some foreign countries’ national health plans may cover Americans who receive care within their borders, Medicare participants generally must make their own financial arrangements for foreign emergency and routine treatment and costly evacuations for medical treatments. Two solutions are available to cover the nightmarish costs that can escalate out of control when a medical emergency arises abroad– supplemental Medicare coverage and private insurance.

Some employers and unions provide retiree coverage that supplements Medicare and may cover travel. Also, Medicare participants can buy optional Medicare supplement insurance against gaps in Medicare coverage such as deductibles and co-payments. These “Medigap” policies are sold by many private insurers as well as AARP and other affinity groups. Medigap premiums can vary considerably depending on coverage desired and the particular insurer, and not every Medigap plan covers medical care outside the United States.

Medigap plans are designated by letter, which indicates the benefits offered. More comprehensive Medigap plans offer some travel emergency coverage. Medigap plans C, D, F, G, M, and N (also E, H, I, and J if purchased before June 30, 2010) cover 80% of certain medical costs in foreign countries after a modest deductible with a current lifetime limit for foreign care of $50,000. Private travel insurance may be another option, but read the fine print to make sure it covers health care and not just lost luggage or trip interruption.

Medical emergencies can happen anywhere so it is important to have comprehensive medical benefits when traveling outside the United States. While Medicare provides high qualify insurance for medical costs within the country, it usually will not pay for foreign treatments or evacuations. To fill this void, Americans should consider Medigap plans or other insurance that covers foreign care. Finally, because limitations apply and benefits may change over time, contact your insurer before you travel outside the United States to make sure you have adequate coverage. The State Department website also can be a wealth of information on dealing with emergencies when traveling abroad.

Further information on this and other subjects is available throughout SpecialNeedsNJ.com. To subscribe to our frequent blog updatres, click on “entries RSS” to the left and then click on “subscribe to this feed.”

Mid wealth retirees typically rely on Social Security, savings, and sometimes pensions to fund retirements. By timing receipt and expenditures of these different kinds of funds, retirees often can generate significant tax savings.

Savings can be either tax free, tax deferred, or taxable. Typical tax free savings are the kinds of municipal bonds that generate tax exempt income. The most common tax deferred savings are IRAs and qualified retirement plans like 401(k) plans, pensions, and profit sharing plans. Qualified retirement plans and some IRAs are particularly advantageous because their initial funding is with pre-tax dollars.

Because tax deferred accounts generate taxable income when withdrawn, it usually makes sense first to spend taxable amounts and defer withdrawing from tax accounts. Therefore, one retirement strategy calls for funding living expenses with Social Security and taxable investments in order to retain tax deferred accounts intact for as long as possible. While that can be sensible for some people, other folks may be able to save substantial tax by deferring Social Security and funding early retirement year expenses entirely from taxable accounts.

Instead of taking Social Security early or at normal retirement, it can pay to wait. Deferring the start of Social Security can increase wealth in two ways. The later you start Social Security up to age 70, the higher your annual benefit. At the same time, starting Social Security later keeps Social Security out of your income longer, which may reduce your income tax rate in early retirement years.

If you don’t take Social Security when you first retire and you keep retirement funds like 401(k) and pension accounts tax deferred by leaving them in the retirement plan or rolling them over to an IRA, your income probably won’t be large if it consists of income and dividends on modest taxable investments, possibly supplemented by tax free bond income. In that case, deferring Social Security will keep your taxable income and tax bracket down.

In addition, as you spend your taxable savings for normal living expenses, your taxable income will drop even further. Depending on your taxable income and tax rate, you may be able to realize substantial reductions in potential tax on your tax deferred accounts by converting some of them to Roth IRAs each year before you start to take Social Security. Roth IRAs are includible in taxable income upon conversion but earnings on the Roth IRA after conversion aren’t taxed at all.

Depending on your other income, you may be able to convert as much as $50,000 from tax deferred regular IRA to Roth IRA without increasing your federal income tax bracket. For instance, if you are married filing jointly with taxable income of $19,000, you would be in the 15% federal income tax bracket in 2011. If you convert $50,000 of your regular IRA or 401(k) account to a Roth IRA, you would stay in the 15% bracket and pay only $7,500 federal income tax on the conversion, which you probably can make up simply through by avoiding tax on post conversion income on the Roth IRA as well as savings by paying tax at a 15% rate rather than the 25% or higher federal income tax rate that would apply to withdrawals from tax deferred accounts and Roth conversions when you are at a higher income tax rate.

By timing spending of pre-tax and post-tax accounts and the start of Social Security, middle wealth retirees can realize significant reductions in potential income tax and increase overall wealth accordingly. However, it is crucial to analyze your particular spending habits, savings, income, and obligations before embarking on any financial plan. While the financial strategies discussed below may save tax and increase wealth for many people, they also can backfire and generate higher tax, lower return on investment, or other negative consequences for people in certain situations.

While Republicans continue to thwart President Obama’s proposals to increase taxes on people earning over $250,000 or even $1,000,000, House Republicans are expected to pass legislation that describes people earning over $80,000 (families earning over $160,000) as high earners who must pay far higher Medicare premiums. Current law sets higher Medicare premiums for individuals earning more than $85,000 and families with incomes over $170,000 and adjusts these thresholds for inflation. The House Republicans’ plan would cut or freeze the high earner income thresholds until 25% of Medicare participants are subject to the high earner premiums. This would trigger a five fold increase in the percentage of Medicare participants facing the higher premiums. Where less than 5% of Medicare participants now pay higher earner premiums, 25% would face the higher charges under the House Republicans’ plan– a dramatic increase in Medicare costs for many Americans of retirement age. Republicans maintain that they simply are cutting federal health care subsidies to better off seniors, but some advocates counter that the change is equivalent to a middle class tax hike since it would force many Medicare participants to pay more to the federal government.

Long term care can cost over $10,000 per month in the most expensive settings and even care at home with part time paid caregivers can cost thousands of dollars per month. Individuals without long term care insurance must look to savings or Medicaid to fund their care. To qualify for Medicaid, an applicant must meet stringent financial tests, but contrary to conventional wisdom, expert advice often can help families qualify for Medicaid without spending all their savings on long term care.

Medicaid is governed by complex and sometime contradictory laws and regulations, and Medicaid planning will not protect savings unless it satisfies all applicable rules and avoids hidden traps for the unwary. Thus, legal training can be essential to develop an effective Medicaid plan. In addition, states as diverse as Ohio, Texas, and Tennessee have ruled that non-lawyers engage in unauthorized practice of law when advising on Medicaid law and developing plans to qualify for Medicaid. Furthermore, faulty Medicaid planning actually can forfeit amounts that otherwise could be protected.

While various advisors may offer to help with Medicaid planning, friendly neighborhood Medicaid planners sometimes have hidden agendas to sell costly annuities, insurance, and other investments to generate large sales commissions rather than meet client needs. This is a particular concern when services are marketed through seminars where a free meal is accompanied by a powerful sales pitch. Thus Medicaid planning truly is a field where buyers should beware.

Detailed information on Medicaid planning is available throughout SpecialNeedsNJ.com. Questions and Answers appear at http://specialneedsnj.com/elder_law.php and via the articles tab]