Archive for February, 2012

$aving Estate Tax Through Portability

Posted on: February 17th, 2012 by Lawrence A. Friedman

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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Should You Buy Long Term Care Insurance?

Posted on: February 2nd, 2012 by Lawrence A. Friedman

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 and Q&As throughout, 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]

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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As this website provides general information and isn’t tailored to your particular situation, it doesn’t constitute legal advice and may not take into account rules and exceptions that affect you. Although updated from time to time, this website may not take account of recent legal developments or differences in laws from state to state. For safety sake, obtain individual legal advice before you act! You assume all risk of acting on information contained in this website. This website doesn’t constitute legal advice, and no attorney-client relationship exists unless FriedmanLaw and you execute a written engagement agreement. Please contact us at 908-704-1900 to discuss engaging FriedmanLaw to help resolve your legal concerns.
Homepage photo: Cows grazing at Meadowbrook Farm, Bernardsville, NJ by Siddharth Mallya. October 23, 2012.
Interior photo: Somerset hills pastoral scene by Lawrence Friedman.