by Ryan L. Broedlin, Esq.
Do you have a will that leaves specific items or lumpsum payments to certain members of your family or close friends? Or are you considering having a will drafted that does so? If so, you are not alone: specific and general bequests like these – gifts of specific property or lumpsum cash payments – are a common and well-intentioned part of estate plans. While seemingly harmless, we find that this type of drafting can wreak havoc on an estate plan in a number of different ways and confuse and defeat the best of intentions. To illustrate how this can happen, we’ll use the example of Mr. Smith.
Mr. Smith is a widower and the loving father of two children who now each have two of their own: three grandsons and one granddaughter, each of whom Mr. Smith loves and adores. A successful man, he has always intended that the bulk of whatever he may leave behind go to his children but after many wonderful years watching them grow up, he also wants to provide for his grandchildren. Rather than calling an attorney that specializes in estate planning, Mr. Smith goes to the attorney he recently used for the purchase of his new home. That attorney drafted – and Mr. Smith executed – a will that leaves his assets to his family as follows: $15,000 to each of his three grandsons; his old sports car valued at roughly $15,000 to the granddaughter (he had always bonded with her over love of that car; what better way to keep it in the family?); and residuary of the estate is left to his own children.
When Mr. Smith executed this will, it looked clear that there would be more than enough money for the gifts to his grandchildren to be made while leaving a substantial sum to the Mr. Smith’s own children. The intervening years, however, were a bit tough. Between home repairs, medical bills, and other unexpected costs, Mr. Smith’s once-hefty bank accounts were substantially depleted. Health issues also robbed him of the ability to drive that sports car he loved so much and it was eventually sold to help with the medical bills. All told, after costs of administration, Mr. Smith’s estate includes only $30,000 of cash to be distributed. Even though there is not enough to fully satisfy Mr. Smith’s intentions, surely everyone can at least get something, right? Wrong.
First, it is important to note that, under New Jersey, New York and Pennsylvania law, specific and general bequests must be satisfied before any residuary beneficiary can participate in a distribution from Mr. Smith’s estate. As a result, the $15,000 gifts to the grandsons and the gift of the sports car to the granddaughter get distributed before Mr. Smith’s own children take anything. While there is not enough to give each grandson a full $15,000, they do get to share in whatever is available on a pro rata basis, leaving each grandson with a cool $10,000; not Mr. Smith’s exact intention, but still pretty good. Then, the executor of his estate would simply hand the keys to the sportscar to Mr. Smith’s granddaughter, but wait: it’s gone and the money from its sale was spent long ago. At least some of the money that went to the grandsons can be diverted to the granddaughter, right? Wrong again. When the object of a specific bequest has been sold, destroyed, or otherwise disposed of, the gift will adeem and the intended beneficiary takes nothing (there are some exceptions to this rule, but none apply here). Finally, there is simply nothing left in the estate to distribute to Mr. Smith’s children so they too receive nothing.
As you can see, the effect of the specific and general bequests to Mr. Smith’s grandchildren was to almost completely frustrate Mr. Smith’s intended plan. His children – who should have taken the bulk of his estate – get nothing, his grandsons get less than Mr. Smith had hoped, and his granddaughter – who Mr. Smith wanted to treat the same as his grandsons, also gets nothing due to the sale of the car.
This result could have been avoided with some very simple changes to Mr. Smith’s will. Indeed, had he consulted an experienced estate planning attorney, that attorney would likely have advised Mr. Smith of the pitfalls of gifting the cash and car the way he had hoped and to instead look at his estate as a pie that he could divvy up amongst his children and grandchildren in different sized pieces. For example, Mr. Smith could have assigned percentages to leave the biggest piece of the pie to his own children while giving smaller, but still meaningful, pieces to his grandchildren. In doing so, each of them would have received something from his estate – a far better result than what actually occurred. Additionally, had it still been around, the sports car could have been used to satisfy the gift to his granddaughter as an “in kind” distribution, thus ensuring that all of Mr. Smith’s intentions were fully met. At the very least, an individual that absolutely wants to make gifts of specific property in his or her will should revisit those documents often to 1) ensure that the specific items of property gifted are still in his or her possession and 2) review whether his or her estate will have the funds necessary to make sure the intended beneficiaries – usually the residuary beneficiaries – can take under the will.
Ultimately, this is a prime example of how not hiring an attorney that specializes in estate planning to prepare your last will and testament can have some tough consequences. If your will has any specific or general bequests that may need changing – or if you have been considering setting your will up like Mr. Smith’s – please call The Murray Firm, LLC at (908) 204-3477 to schedule a free consultation to discuss.
The Murray Firm, LLC is proud and excited to announce that our paralegal, Kristen Frolich, has passed the official test to become a Certified Medicaid Planner! She joins an elite few in the country that have earned the title of CMP™ and she is the first Certified Medicaid Planner in the State of New Jersey.
In order to become a CMP™, Kristen needed to demonstrate a mastery of subject matter involved in Medicaid planning including eligibility standards and financial strategies. In order to sit for the exam, Kristen was required to have 6 years of experience in the field of Estate Planning and Elder Law as well as a Certificate in Paralegal Studies.
Medicaid planning is a complex and confusing path to navigate, specifically in the State of New Jersey. With the constant change in Medicaid rules and strategies, utilizing a Certified Medicaid Planner will ensure that you are working with someone who is an expert in the field and that your interests are protected.
The Murray Firm, LLC is committed to constantly improving the type of service that we can provide to our clients. We congratulate Kristen on her success!
Recently, Americans have been flooded with information regarding impending changes to the federal tax laws. With all of the news of the proposed federal tax regulations, it is easy to overlook the changes to the estate tax coming to New Jersey next year. Beginning on January 1, 2018, the New Jersey estate tax will be completely eliminated. This means that if a person passes away on or after January 1, 2018, their estate will not be subject to the New Jersey estate tax. The current tax law states that if a person passes away prior to January 1, 2018 and their estate is valued at more than $2 million, an estate tax would be imposed.
The repeal of the New Jersey Estate tax does not affect the current state inheritance tax. The New Jersey Inheritance Tax is imposed based on the relationship between the decedent and the beneficiary. New Jersey places beneficiaries into various classes (Classes A, C, D & E). The amount of the tax is based on the class of beneficiary and the amount of the inheritance received. Click here for more information on New Jersey beneficiary classes. For example, a spouse or child would be considered a Class A beneficiary and not subject to inheritance tax. However, if an estate is left to a sibling (a Class C beneficiary), each sibling would be subject to inheritance tax depending on the value of the estate. In the case of a Class C beneficiary, each beneficiary would be taxed between 11-16% for any inheritance more than $25,000.00. Class D beneficiaries are anyone who is not a Class A, C or E beneficiary and the tax is either 15% or 16% depending on the amount of the inheritance. Class E beneficiaries are qualified charities, religious institutions, and other exempt organizations from whom no inheritance tax is owed.
The repeal of the New Jersey Estate Tax has no bearing on the federal estate tax. The tax plan that has been proposed by President Trump would mean an end to estate tax altogether. Until Congress can come to an agreement, beginning on January 1, 2018, if an estate is valued at more than $5.6 million, it will face a federal estate tax (also known as the death tax). For a married couple, when a spouse passes away, the surviving spouse has the option to elect portability of the deceased spouse’s unused exemption to pass the unused portion of the $5.6 million exemption to his or her estate. In effect, a married couple has the ability to exclude $11.2 million from the federal estate tax.
Overall, it is important to remember that New Jersey tax laws are likely to change with a new Governor taking office in January. While the removal of the New Jersey estate tax will certainly be a welcome change to the New Jersey tax code, it is more important than ever to ensure that your estate is set up in such a way that your beneficiaries will feel as little tax consequence as possible. With years of experience in the estate planning and elder law field, I am confident that my team will be able assist any client in navigating the planning that should be put into place. Please call my office at (908) 204-3477 to schedule a free consultation to discuss any estate planning issues.
How Life Insurance Beneficiary Designations Play An Important Role In Your Estate Plan by Robert Murray
The Ins and Outs of Life Insurance Beneficiary Designations
How Life Insurance Beneficiary Designations Play An Important Role In Your Estate Plan
Typically, when you think of estate planning, you think of the Last Will & Testament, Durable Power of Attorney, Advance Healthcare Directive, and Living Will. The assumption is that as long as those documents are in place their estate affairs will be in order. What many clients do not realize is that life insurance and other non-probate assets play an important role in their estate plan.
A life insurance policy is considered a “non-probate asset” meaning that the proceeds from the policy can be paid directly to the beneficiary outside of the formal probate process. For this reason, it is vital that primary and contingent beneficiary designations always be up-to-date when formulating an estate plan. The mistake that we see most often with our clients is that a beneficiary may be designated, however, a contingent beneficiary is not chosen. For example, a person takes out a life insurance policy in 2007 and lists their son (an only child) as the beneficiary. No contingent beneficiary is listed. In 2009, the son passes away. In their grief, the policy owner does not contact the insurance company to update the beneficiary designations. A number of years later, the policy owner passes away without a living beneficiary on the policy. By default, the estate would become the beneficiary of the policy thereby forcing the proceeds to potentially be subject to inheritance tax in New Jersey or Pennsylvania depending on the relationship between the decedent and the beneficiary. A mistake can cost beneficiary thousands of dollars in taxes if the owner of the policy does not properly designate a beneficiary.
A person or entity can be listed as a beneficiary of a life insurance policy. For more complex planning, a trust for the benefit of another person can also be listed as a beneficiary. Every company that offers life insurance has their own beneficiary (or change of beneficiary) form along with very specific ways that these forms must be completed. For example, if you decide to name a trust as the beneficiary of the policy, the trust must be specifically designated on the form. Not designating the trust correctly could result a beneficiary receiving the proceeds of the policy outright which could cause a number of issues. Often times the space provided on the form is not sufficient to include the entire trust designation. In those instances, we prepare a supplement to include all the necessary information. Each carrier has their own mandates for submitting supplements so the process will differ depending on your policy.
Ensuring that beneficiary designations are correct and up-to-date with any life insurance policy is a key element of any estate plan. The team at The Murray Firm, LLC will walk you through the process to ensure that your life insurance designations are in-line with your overall estate plan. For more information on estate planning or life insurance beneficiary designations, please call our office at 908-204-3477 or e-mail us at email@example.com.
I did it for my country….
While these six words are simple in nature, they hold a tremendous amount of importance for a Veteran who has served in any branch of the military. Not every person is cut out to be a member of the military. It takes a very unique individual who is willing to sacrifice their time and dedication to ensure the people of the United States of America are safe. At times, this sacrifice entails risking their lives in order to safeguard our freedom.
While there is no way our government can truly thank Veterans and their families enough for their service, the Department of Veterans Affairs has developed a program that helps to supplement income for disabled or sick veterans (or their spouses) who served during specific war time eras. In order to qualify for this type of benefit, first and foremost, the Veteran must have served at least 90 days of active duty service with at least one day of service during a designated war time period. The wartime periods can be found at this link: http://www.benefits.va.gov/pension/wartimeperiod.asp Eligibility can easily be determined by checking the veterans discharge papers, also known as their DD-214.
Once war time service has been established, the VA will then look to the veteran’s (or spouse’s) current health status. In order to qualify for the benefit, the applicant must show that they have certain physical limitations. Those limitations would include being totally and permanently disabled, being a patient at a nursing home or needing a higher level of care at an assisted living facility, or being blind. For example, if your loved one requires assistance bathing, eating, transferring, toileting, or dressing themselves, then he or she would meet the medical requirements for the benefit.
Finally, the VA will look at the applicant’s financial situation. The VA requires the applicant to provide information regarding their income and assets. First, the claimant must have unreimbursed medical expenses that exceed his or her income. Second, the claimant’s assets have to be below approximately $40,000 for an individual or $80,000 for a married person. The primary residence is not considered a countable asset. Based off of that information, the VA will then determine the benefit amount that the applicant is eligible for. Benefit amounts can vary depending on the case, however, there is a potential that the applicant could receive thousands of more dollars per year through this program.
The VA Pension Amounts can be found at the following link: http://www.benefits.va.gov/pension/current_rates_veteran_pen.asp
Combined with the proper long term care plan, the Veteran’s Aid and Attendance benefit is a program that could help to ease the financial burdens that a family often experiences as their loved one grows older. Our team at the Murray Firm is dedicated to assisting as many Veteran families as possible to attain this valuable benefit. With our experience, expertise and a proven record of approvals for this benefit, we are confident that we can guide an eligible applicant through the process.
There is a common misperception that the Will controls the entire distribution of a person’s assets; however, this commonly held belief is not accurate. The Will only controls the distribution of probate assets. There are two types of assets included in one’s estate: probate and non-probate assets. Probate assets are those that do not have a right of survivorship with a joint owner or a beneficiary designation that directs which beneficiaries are to receive the asset upon death.
For example, if a married couple owns a home as husband and wife, also known as tenancy by the entirety, or a bank account jointly, when the first spouse passes away, his or her half ownership interest in the property or bank account immediately vests in the surviving spouse outside of the probate process. The same applies to a life insurance policy in which there is a named beneficiary. When the named insured passes, the listed beneficiary receives the death benefit outside of the probate process. Jointly owned real estate with a right of survivorship, jointly owned bank or brokerage accounts, life insurance, 401(k), IRA’s and bank or brokerage accounts with a beneficiary designation are all examples of non-probate assets.
So why is this important? Let’s say person A executes the most beautiful, valid Will in the world that leaves all of person A’s assets to a Person B, but Person A owns all of their assets jointly with Person C. Who do you think inherits all of person A’s assets? Yes, you are correct if you said person C. Person B receives nothing upon the death of person A and everything goes to Person C. Once instance in which I often see someone leave assets to another beneficiary unintentionally is when a parent adds a child’s name to their bank accounts so that the child can “write checks” for them. The parent often does not realize that when he or she passes away, the child whose name is on the account will inherit the account balance upon their death along with whatever probate assets will be coming their way under the parent’s Will. As you can imagine, an unintended and inconsistent estate distribution can lead to Will contest, ensuing litigation, and broken family bonds that are often irreparable.
The reality is that the everyday person does not think about or necessarily know the difference between probate and non-probate assets. This is the reason why it is important to work with financial and legal advisors to ensure your estate plan is exactly what you intend it to be.
As an elder law attorney, I am often asked the questions: “Once I execute my power of attorney may I change it in the future? How can I terminate my Power of Attorney?”
Every adult individual over the age of 18 should have a financial power of attorney (“POA”) in place. A POA allows you, the “principal”, to give someone else, “your agent”, the authority to manage your financial and business affairs. The Agent does not get an ownership interest in your property, but instead a fiduciary duty is imposed on the agent to act in the best interest of the principal. If your Agent fails to act in the principal’s best interest, the principal has the right to revoke the power of attorney and remove the agent from authority. A POA is very flexible in regards to what authority is given, for what time period it is effective, and who gets the authority. The principal decides exactly what powers are granted to the agent and how they will be exercised.
How exactly does the principal terminate a POA? There are actually multiple ways you can terminate the authority granted under a power of attorney: 1) Death, 2) Specify in the document when the POA expires, 3) Execute a new POA, 4) Court Order, 5) Destruction of the Original.
Once the principal passes away the powers granted to the agent under the POA expire and the Will becomes effective. Second, the POA itself can say when the authority ends. If you are leaving the country but need your son to manage your property, hire a landscaper, and pay utilities and taxes, your POA can state: “The enumerated powers are in effect from June 1, 2016 to August 31, 2016.” Third, when the principal executes a new POA, typically the first statement of the POA revokes the authority of the previous document. Fourth, you can petition the court to remove an agent if the principal loses capacity and it can be proven with clear and convincing evidence that the principal is not acting in the principal’s best interest. Fifth, the principal can destroy the original POA.
Once a POA is revoked the principal or new agent should contact all his or her financial institutions to notify them the previous POA has been revoked and a new agent has been appointed. The principal should also notify the former agent in writing so that it is clear he or she is no longer authorized to act on behalf of the principal. An agent who acts in good faith and without knowledge of termination is shielded from liability and any 3rd party who relies on such authority will be protected.
Deciding who will be your agent is a very important decision. Your agent should be someone who you trust implicitly with your affairs and who is capable of making sound financial and business decisions. If you need guidance on making this decision, I recommend you speak to an experienced attorney to help you with the process.
On December 19, 2014, President Obama signed into law “The Achieving a Better Life Experience (ABLE) Act,” which allows for qualified individuals to have a tax-free savings account to help meet their disability needs. On January 11, 2016, Governor Christie signed bills that allowed for qualified individuals to establish ABLE accounts in New Jersey. Unfortunately, it takes the government time to implement such a program so it is looking like these accounts will not be available in New Jersey until the end of 2016.
I believe that ABLE accounts will become a common planning tool for families with special needs individuals because they allow a family to set up a special savings account for disability-related expenses, without the additional administration and costs of setting up a special needs trust. This will allow more families access to a savings vehicle to promote the independence of the disabled individual, while maintaining eligibility for Supplemental Security Income (SSI) or Medicaid.
The ABLE account is the offspring of a 529 Account, which allows a tax free savings vehicle for allowable education expenses. In fact, an Able account is also known as a 529-ABLE Account. Contributions are made with after-tax dollars up to a maximum of $14,000 per year from all sources, but the growth is tax-free. Similar to a standard 529 Account, withdrawals must be for qualified expenses otherwise the gains would be subject to income tax and penalties. An ABLE account may be used for education, housing, transportation, employment training, personal support, health, financial management, legal fees, burial expenses, among others.
In order to qualify for an ABLE account, an individual must have been diagnosed with a disability before the age of 26 AND receiving SSI or SSDI under Title II of the Social Security Act OR has a physical or mental impairment which can be expected to result in death or which has lasted or expected to last for a continuous period of not less than 12 months or is blind AND provides documentation of the diagnosis signed by a physician. Only one ABLE account can be established for a qualified beneficiary.
An individual’s ABLE Account can have up to $100,000 that does not count toward the SSI or Medicaid Resource Limit of $2,000. If the account exceeds $100,000, the individual would no longer be eligible for SSI; however, he or she would not lose Medicaid coverage.
ABLE accounts will be a useful planning tool in conjunction with Special Needs and Supplemental Needs Trusts; however, they will not negate the need for estate planning specifically tailored for special needs individuals. I highly recommend anyone who may have a family member with special needs to speak with an experienced special needs attorney to find out if establishing an ABLE account makes sense for their individual situation.
by Andrea Di Dio, Esq.
When most people think about the benefits of having a life insurance policy, they are usually thinking about the benefit of financially providing for loved ones in the event of an unanticipated death. What most people do not realize is that a life insurance policy is a tax-efficient way to transfer wealth to your beneficiaries.
Before I go into more detail on the tax benefits of life insurance, it is important to understand the estate tax and inheritance tax. The estate tax is based on the assets a person owns when they die. The federal estate tax exclusion is $5.45 million per individual and $10.9 million with portability for a married couple. New Jersey has an estate tax exclusion of $675,000 per individual and Pennsylvania does not have an estate tax. Less than 1% of estates are subject to the federal estate tax so it is really the state estate tax we are concerned with. The inheritance tax is based on the relationship between the decedent and the beneficiary receiving an inheritance.
The death benefit of a life insurance policy is included in the gross taxable estate of the policy owner. This means that the death benefit increases the amount of the estate tax owed by the policy owner. One way to avoid this consequence is to plan with an Irrevocable Life Insurance Trust, aka ILIT, which excludes the policy from the decedent’s taxable estate, thereby allowing the beneficiaries to receive the proceeds without owing an estate tax or inheritance tax. You should consult with your attorney and insurance advisor to discuss whether an ILIT makes sense for your planning.
Generally, life insurance proceeds are not subject to the inheritance tax, which makes it an extremely useful vehicle to plan in states that have an inheritance tax like New Jersey and Pennsylvania. I’ll provide a New Jersey and Pennsylvania example to illustrate how planning with life insurance can save taxes. In New Jersey, Class A beneficiaries – parents, grandparents, children, grandchildren, etc. – are not subject to the inheritance tax for any inheritance received whether it is life insurance, annuities, bank/brokerage accounts, real estate or any other asset; however, Class C – siblings – and Class D beneficiaries – everyone else – are subject to the inheritance tax if they receive an inheritance other than the proceeds of a life insurance policy. For example, let’s assume a New Jersey man wanted to provide for his longtime girlfriend, a class D beneficiary, after his death. The best way to do so would be through life insurance because she would receive the proceeds inheritance tax free; however, had the man decided to leave his girlfriend real estate or bank/brokerage accounts, the bequest would be subject to the New Jersey inheritance tax. In Pennsylvania, generally only surviving spouses are exempt from the inheritance tax. Everyone else is subject to the inheritance tax in PA, which makes using life insurance as a wealth transfer vehicle even more appealing for all classes of beneficiaries.
If you are concerned about your beneficiaries’ inheritance tax implications, an elder law attorney can plan for this situation and refer you to a trusted insurance professional to prepare the most appropriate, tax-efficient estate plan for your family.
by Andrea Di Dio
I recently had a phone consultation with a lady who decided to apply for Medicaid for her mother without consulting with an Elder Law Attorney. When her mother entered the skilled nursing facility, she had less than $40,000 remaining in her individual name. The daughter was unaware of the resource limit to qualify for New Jersey’s Medicaid Only program, which allowed her mother a maximum of $2,000 in her name. The daughter believed she could help her mother become eligible by transferring $34,000 of her mother’s money to herself and her children leaving her mother with $6,000 to spend on her care for the next five months – this was a critical mistake!
The problem was that the daughter was unaware of Medicaid’s transfer penalty rules. Medicaid has a 5 year look back to discover if the applicant made any transfers for less than fair market value, aka “gifting,” to ensure only those who are in financial need of Medicaid benefits will qualify. If gifting is discovered, the Medicaid agency assesses a penalty period. The penalty period is determined by adding up the value of transfers and dividing this value by the average cost of nursing home care in New Jersey ($332.50/day or $10,307.50). Once this penalty is assessed, the County Medicaid agency essentially informs the applicant that despite being medically eligible and having only $2,000 remaining in their name, the government will not cover the cost of care for the duration of the penalty period. As you can imagine this can have a devastating effect on an applicant and their family. As for the daughter’s situation, her mother was hit with a 3.5 month penalty period for the transfers made to the daughter and grandchildren. These transfers ultimately cost the family an outstanding bill of close to $100,000. The most unfortunate part of this situation is that it could have been completed avoided if the mother and daughter would have consulted with an experienced elder law attorney when they first considered the need for Medicaid benefits.
An elder law attorney would have sat down with the family and explained every relevant aspect of the Medicaid program including how to become eligible, what care would be covered, how the government would seek reimbursement after the Medicaid recipient passes away, and how the attorney could help to make the application process as smooth as possible. The attorney would be very candid about the family’s situation and if nothing more, the family would have walked away with a complete understanding of the process that lies ahead of them.
Whether you realize it or not, applying for Medicaid benefits is a legal process and one should not go about it without consulting the appropriate legal professional. Anyone who recommends otherwise, is simply doing you a disservice that could have devastating results.
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