Archive for April, 2018

New Jersey and Estate Tax – Will They or Won’t They?

Posted on: April 30th, 2018 by Mark R. Friedman

For a while now, New Jersey estate planners have been playing a guessing game.

Guessing whether New Jersey will bring back the estate tax.

The estate tax is a tax that your estate pays when you pass away. In the past, anyone who died in New Jersey and left behind an estate valued at more than $675,000 had to pay the estate tax (with some work-arounds like leaving property to a spouse or charity).

From the State’s perspective, the estate tax was good, because it brought in much-needed revenue to pay for schools, roads, police, etc. And back when New Jersey’s estate tax was created, this sort of tax was common among states.

But in the years since then, many other states raised their thresholds significantly, or eliminated estate tax altogether. New York’s estate tax threshold was $1 million, which was then raised to over $5 million. Many of New Jersey’s other neighbors have no estate tax. And many older New Jerseyans are moving to states like Florida that have lower taxes in general.

When residents leave New Jersey for lower tax states, the State loses revenue. So it’s a balance – taxes generate revenue, but if they drive residents away, the State ultimately loses revenue.

I think the tipping point may have come a few years ago when David Tepper, a wealthy hedge fund manager, moved from New Jersey to Florida.  Mr. Tepper was New Jersey’s wealthiest resident, and he reportedly owned property in both New Jersey and Florida, so he simply changed his residency to Florida.  Reportedly when he did so, New Jersey lost hundreds of millions of dollars in lost taxes.

In 2016, New Jersey passed a tax reform bill that changed the gas tax, sales tax, and estate tax. The gas tax was increased, sales tax decreased, and estate tax decreased and eventually eliminated.

In 2017, the estate tax threshold in New Jersey was raised from $675,000 to $2 million. And in 2018, the New Jersey estate tax was eliminated.

As of this writing, if you die a resident of New Jersey, you don’t have to pay New Jersey estate tax, no matter the value of your estate.

That said, the estate tax reform was enacted under our previous governor, Chris Christie. We have a new governor now, Phil Murphy, who has proposed increased funding for a number of measures, particularly schools.

This comes on top of a state budget that is already strained, with increasing pension obligations that pose fiscal peril.

In short, the state needs more revenue. So some professionals who work in this area think that the estate tax will come back in the near to mid future. Governor Murphy has said he intends to leave the estate tax eliminated, but if we face a true budget crisis, who can predict what will happen.

For our part, we try to do estate planning both for now, and for the future. If we think a client may have a valuable estate in the future, we sometimes recommend including provisions in the will that could save New Jersey estate tax, if it comes back. One example is a credit shelter trust, which allows a married couple to take advantage of both spouses’ estate tax exemptions when passing assets to their children.

When we write wills, we try to give our clients options that don’t have any negative effects, but can decrease their taxes in the future if New Jersey does bring back the estate tax.

If you would like to find out more about creating a will, please call or email FriedmanLaw.

Special Needs Trusts and Retirement Accounts

Posted on: April 23rd, 2018 by Mark R. Friedman

A special needs trust is important if you have a child or grandchild, or another person in your life, with disabilities who you want to leave property to when you pass away.

A lot of people with disabilities receive disability benefits, which are often valuable and important. Some of these disability benefits programs are means-tested, which means that you must have limited assets and income (means) in order to be eligible for these programs.

SSI and a number of Medicaid programs have asset limits of $2,000. That means a person with disabilities must maintain assets under that figure to remain eligible for these benefits.

So if you leave property to your child with disabilities, you may be disqualifying her from disability benefits on which she relies.

Instead, those assets can be left to a special needs trust, a legal instrument in which the money is held and managed by someone other than your child (the trustee). The trustee controls the money, but can only spend it for the benefit of your child (the beneficiary). If the trust is created and administered correctly, the property can be used to benefit your child while your child remains eligible for disability benefits.

That said, a special needs trust only works if the property you want to leave to your child goes to the trust instead. For much of your property, this can be accomplished with your will. But as we wrote last week, some of your property may pass outside your will by law – life insurance with a designated beneficiary, houses owned by joint tenants with a right of survivorship, bank accounts with a payable on death beneficiary.

One type of property that often passes by law is retirement accounts. If you designate a joint beneficiary, the account will typically pass outside your will to that beneficiary. And because of favorable tax treatment, there is usually good reason to designate a beneficiary on your retirement accounts.

That designated beneficiary can be the trustees of your child’s special needs trust.

The beneficiary designations have to be completed in a particular way in order to achieve this. FriedmanLaw can work with the custodian of your retirement account (Vanguard, Fidelity, etc.) to set up beneficiary designations leaving the account to the special needs trust.

If you’re interested in learning more, please call or email FriedmanLaw today.

Does my will cover my retirement accounts?

Posted on: April 20th, 2018 by Mark R. Friedman

Everyone should have a will.

It’s the most basic component of an estate plan. In it, you set forth your directions on how your property should be distributed after you die, who should manage your affairs, who should take care of your children, etc.

However, in some cases your will does not cover all of your property. Certain property will pass outside your will. The legal system calls this property “non-probate assets,” because it passes outside probate by law. In other words, the legal directions regarding this property take precedence over the directions you set forth in your will.

Examples of non-probate assets include joint property with a right of survivorship. If a married couple buys a house together, and the husband dies, the house usually passes by law to the wife. Another example is a bank account with a payable on death (POD) beneficiary. If you have a bank account and you designate your brother as POD beneficiary, but your will says that everything goes to your child, then usually when you die the bank account will still go to your brother. Likewise for a life insurance policy, if you have a designated beneficiary on that policy.

One type of asset where this becomes especially important is tax-advantaged retirement accounts, like an individual retirement account (IRA), Roth IRA, 401(k) account, etc. These accounts get favorable tax treatment. That tax treatment of retirement accounts is described in detail elsewhere, but essentially, these accounts typically let you defer paying taxes until later, allowing your investments to grow with money that would have gone to taxes. Or they allow you to pay taxes now, and avoid paying taxes later on your investment gains.

The bottom line of this favorable tax treatment is that it’s usually more profitable to keep your money in these accounts longer, and delay taking withdrawals for as long as possible.

If you pass away, and you still have money in these retirement accounts, for some accounts you have to distribute the entire remaining balance of the accounts within five years. Unless you have a designated beneficiary on the account. If so, and if the account is set up right, it can be transferred to that beneficiary, and be distributed over that beneficiary’s lifetime. That means it may be able to distribute the account over forty years, instead of five. That could result in enormous gains – depending on how the numbers play out, tens of thousands, hundreds of thousands, or even millions of dollars.

So there are compelling reasons to have a designated beneficiary on your retirement accounts. That said, doing so means the account will go to the beneficiary, and not pass under your will. Your will can include safety measures like trusts, in case the beneficiary shouldn’t receive the money – for example, if they’re too young to wisely manage it, or they are irresponsible with money, or they have a drug problem and shouldn’t have access to a large amount of money, or they receive government benefits that they would lose if they receive a large sum of money.

Leaving the property directly to a beneficiary circumvents the trusts that would protect the beneficiary in these scenarios.

It’s possible to instead leave retirement accounts to a trust, and still get favorable tax treatment, but the trust has to be set up properly.

The bottom line is that retirement account designations, as well as a will and other non-probate assets, are part of a hollistic estate plan. If you want to get started crafting yours, or it’s time to review your estate plan, FriedmanLaw is available to help. Call or email us today.

Will NJ Medicaid pay for my care at home?

Posted on: April 16th, 2018 by Mark R. Friedman

We get asked this question a lot. And the answer is maybe.

New Jersey Medicaid can pay for home health aides to come to your home and provide care to you. However, there are two caveats to that.

First, you may not get as many hours of home health care as you think you need. New Jersey has privatized its Medicaid program to some degree – instead of the state paying providers directly, the state makes payments to managed care organizations (MCO’s), which are health insurance companies like United Healthcare and Horizon NJ Health.

If you qualify for Medicaid and seek aides at home, the MCO will send out staff to evaluate your needs. It will award you a number of hours based on that assessment.

Here’s the thing. These are private insurance companies, and they are seeking a profit. They get a fixed payment from the state for each Medicaid beneficiary. So they make more money when they pay for fewer aide hours, and they lose money when they pay for more hours. The MCO has a natural incentive to award you as few hours as possible.

Typically, we see people get between twenty and fifty hours per week, with maybe thirty or forty being typical. That works out to around four to six hours per day, seven days a week. Or maybe seven or eight hours a day, five days a week. If that’s enough to meet your needs, then you may be a good candidate for home care with Medicaid.

To get it, you’ll have to qualify for Medicaid’s long term care (LTC) program. The LTC program has strict eligibility requirements. You must have less than $2,000 in assets. In addition, you’re required to submit five years’ worth of records for all financial accounts, and Medicaid staff will review those records to see if any gifts have been made. Any gifts that were made affect eligibility. Likewise, Medicaid will look to see if there are any hidden accounts. You also must meed medical eligibility requirements for the LTC program, and various other requirements.

There are a lot of moving parts to obtaining Medicaid. You may have to spend down your assets to get below $2,000, and you may want to do that in a way that’s least unfavorable to your spouse and children.

If you’re interested in having long term care Medicaid pay for home health aides, you may have questions regarding the Medicaid spend-down, and you may need help applying for Medicaid. FriedmanLaw is available for these issues. Call or email us today.

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.