Thursday, April 17, 2014

Big Changes for New York's Estate Tax

On April 1, 2014, Governor Andrew Cuomo signed into law the first significant changes to New York’s estate tax in almost 15 years. The new rules will further reduce the number of New York estates that will be subject to a state estate tax.  But for the wealthiest New Yorkers, the new legislation may lead to a more significant estate tax burden than would have been in effect under the prior rules.
First, the good news.  From 2000 through April 1, 2014, New York’s estate tax exemption had remained fixed at $1 million per person. During the same time period, the federal exemption had increased from $1 million to the current exemption amount of $5.34 million per person. Since many states do not have a separate state estate tax, the increasing divergence between the New York exemption and the federal exemption was seen as creating an incentive for New Yorkers to relocate to states (such as Florida) that do not have an independent state estate tax.
With an eye towards being more competitive with other states, the increase in the New York State estate tax exemption is being phased in over five years as follows:
           For deaths occurring between:

  • April 1, 2014 to March 31, 2015 -- $2,062,500
  • April 1, 2015 to March 31, 2016 -- $3,125,000
  • April 1, 2016 to March 31, 2017 – $4,187,500
  • April 1, 2017 to December 31, 2018 -- $5,250,000

Beginning in January 1, 2019, the New York estate tax exemption will be indexed for inflation to match the existing federal exemption.
While the new law provides immediate and rapidly accelerating relief for most New York estates, estates of decedents with assets in excess of the then-applicable exemption may be in for a rude surprise because of what practitioners are referring to as the estate tax “cliff”.  Specifically, if the decedent’s taxable estate is more than 105% of the New York exemption then in effect, the result will be the loss of the entire applicable exemption.
For example, if a person dies July 1, 2018 with a taxable estate of $5,500,000 (which is just below 105% of the $5,250,000 basic exclusion amount then to be in effect), the estate will be able to use the applicable credit of $420,800, resulting in a New York estate tax of $30,000.  If, however, the decedent’s taxable estate was instead $5,513,000 – that is, just $13,000 more than the taxable estate in the prior example, but more than 105% of the $5,250,000 basic exclusion amount then in effect – the credit of $420,8000 is rendered useless, resulting in a whopping New York estate tax obligation of $452,360.  Thus, the bizarre result would be that for two taxable estates having just a $13,000 difference in value, the additional tax paid by the larger estate would be $422,360!

A further twist is that gifts made within three years of death, if made between April 1, 2014 and January 1, 2019, will be added back to the decedent’s taxable estate unless the decedent was not a New York resident at the time the gift was made. This rule applies even to gifts of real estate and tangible personal property located outside of New York State, even though such property would not have been subject to New York estate tax had the decedent owned the gifted property at the time of her death.

The bottom line: while the estates of a growing number of New Yorkers will be exempt from the obligation to pay New York estate tax, the wealthiest New Yorkers may have even greater incentive than before enactment of the new rules to establish residency in a state that does not impose a state estate tax.

Thursday, February 27, 2014

Beware of Potential Liability When Signing a Nursing Home Contract

“Crisis” Medicaid planning typically involves the transfer of assets from the person seeking nursing home Medicaid coverage to one or more family members. While the transfer of assets to a spouse or disabled children constitutes “exempt” transfers that do not impact the donor’s Medicaid eligibility, transfers of assets to non-disabled children or other persons during the five-year “look back” period will result in a period of Medicaid ineligibility for those seeking nursing home Medicaid.
Even in a crisis planning situation, however, implementing a technique known as “half-a-loaf” planning makes it possible to preserve at least one-half of a nursing home resident’s assets when seeking Medicaid coverage for the cost of their care.  Unfortunately, too many people do not seek qualified professional advice when applying for Medicaid for a loved-one, and too often make assets transfers that result in significant financial penalties for not only the person applying for Medicaid coverage, but also for other family members to whom asset transfers were made.

A recent New York court case, Aaron Manor Rehabilitation and Nursing Center, LLC v. Diogo, decided on February 14, 2014, highlights this dilemma.  In that case, Grace Diogo was admitted in 2011 by her niece, Annette Louis, to the Aaron Manor nursing home.  Ms. Louis, who Ms. Diogo had designated as power of attorney, signed the nursing home admission agreement on Ms. Diogo’s behalf.  Under the terms of the admission agreement, Mr. Louis agreed to use Ms. Diogo’s assets to pay for Diogo’s cost of care, and to apply for Medicaid for Ms. Diogo.

In 2009 – two years before Ms. Louis signed the nursing home admission agreement for her aunt – Ms. Diogo gave Ms. Louis and her mother $24,000 apiece.  Since those transfers constituted non-exempt transfers that were made during the 5-year look back period, they resulted in a Medicaid “penalty period” of approximately 5 months, during which time the nursing home was not paid by either Ms. Diogo (who by 2011 was essentially out of money), or Medicaid.  

Evidently not pleased to be left holding the bag, the nursing home sued Ms. Diogo and Ms. Louis for over $62,000, asserting a number of contractual and tort claims including breach of contract, unjust enrichment, and fraudulent conveyance. Central to the nursing home’s position was the signed nursing home agreement that required Ms. Diogo (and her agent, Ms. Louis), to use Ms. Diogo’s funds to cover the cost of care. Among other claims, the nursing home asserted that the 2009 transfers constituted a breach of that promise, since those transfers during the penalty period left Ms. Diogo unable to cover the cost of her care during the resulting Medicaid penalty period.

In its recent decision, the Appellate Division for the Fourth Judicial Department denied the nursing home’s motion for summary judgment, stating that Ms. Diogo and Ms. Louis had raised genuine issues of fact as to whether the 2009 transfers actually constituted a “fraudulent conveyance,” and whether Ms. Louis had in fact acted in compliance with the nursing home agreement.  The matter was returned to the trial court for further proceedings, which likely will include a trial on the merits unless the parties are able to settle the case before trial.

But even though Ms. Diogo and Ms. Louis’ may have “won” the case at the appellate level, in a practical sense they have already lost.  They (most likely, Ms. Louis) have almost certainly spent many thousands of dollars on legal fees; and, if they don’t settle the case anytime soon, many more thousands of dollars in fees will be sure to follow, with no guarantee that they will prevail at trial.
All of this could have been avoided had Ms. Diogo and Ms. Louis retained experienced legal counsel to design and implement an appropriate “crisis” Medicaid plan to preserve as much of Ms. Diogo’s assets as possible.  An elder law attorney might have recommended a technique known as “reverse half-a-loaf,” under which a portion of the funds gifted in 2009 would have been returned to Ms. Diogo.  The returned funds would then have been loaned to Ms. Louis and repaid under a Medicaid compliant promissory note.  Such a strategy would have ensured that there were sufficient funds to cover a shortened Medicaid penalty period, while preserving at least a portion of the previously gifted assets.  Under that strategy the nursing home would have been paid from the loaned funds during the Medicaid penalty period, with no gap in payment since Medicaid would have begun paying the nursing home immediately upon the conclusion of the penalty period.  

While there is a cost to hiring an elder law attorney to design a crisis Medicaid plan, I can say with confidence that the cost pales in comparison to the cost of litigation, while producing superior results. As Ms. Diogo and her family discovered the hard way, it is rarely a good thing to see you name appear in a court caption!

Wednesday, February 19, 2014

Why are the Elderly are so Susceptible to Scams?

Here's a recent Forbes column that explains why the elderly are more likely than others to fall prey to telephone and internet scams.  Bottom line:  adult children and other family members must stay in close contact with their elderly loved-ones and be aware that the elderly family member is almost certain to be repeatedly targeted for scams.  The parent or loved-one should be repeatedly reminded to be skeptical if they are offered any type of deal on the phone or the internet by someone they don't know.  And, they should be told to report any suspicious activities to the child or other trusted family member.

Thursday, January 30, 2014

Preserving Income Under Community Medicaid With Pooled Trusts

When given the choice, most people would prefer to “age in place” in their residence rather than in a nursing home or similar facility. But for everyone other than the wealthy – or those fortunate enough to have robust long-term care insurance policies in place – paying the cost for long-term care is a major stumbling block.

Medicare provides minimal coverage for long-term care costs, and only then for “skilled” care such as nursing care, physical therapy, speech therapy and occupational therapy.  Most long-term health needs, however -- which are not covered by Medicare -- consist of “custodial” care, such as assistance with dressing, eating, toileting, bathing, transferring (i.e., from a bed to a chair) and similar “activities of daily living.”  For those without long-term care insurance, the only alternative to the use of personal resources to cover the costs of such custodial care is Medicaid.

While virtually every American 65 or older receives Medicare, Medicaid qualification is subject to strict income and resource limits. But for those seeking Medicaideligibility for home care, there are ways to gain eligibility for the program without having to spend down most of one’s income or assets.

In 2014, an individual applying for one of the available community long-term care Medicaid programs can retain total resources of $14,550, plus their home (which is deemed an exempt resource). But removing “excess” resources for Community Medicaid purposes is rather straightforward, as under Community Medicaid there are currently no “look back periods” or “penalty periods” for asset transfers; this is in contrast to the nursing home Medicaid program, which currently imposes a period of ineligibility for benefits for most types of asset transfers made to non-spouses during the five-year “look back” period prior to the date of filing an application for nursing home Medicaid. 

Given that there are no asset transfer penalties for Community Medicaid, the usual strategy in spousal cases is to transfer any excess resources into the name of the “well” spouse.  For single applicants, or in cases where both spouses need care, assets can be transferred to other family members, or to trusts for their benefit.

As far as the income requirements, the current maximum income allowance for Community Medicaid is $809 per month.  Without any planning, any excess income must be applied to a Medicaid “spenddown,” with Medicaid then paying the balance towards the cost of care.  For example, a person with $2,000 per month of recurring income (typically Social Security and a pension) would have to contribute $1,191 of her income towards her cost of home care, with Medicaid paying the difference. 

A practical limitation of the income rules is that the $809 income allowance does not take into account the applicant’s household expenses, such as rent, mortgage, property taxes, or utilities.  Given those typical expenses, it can be difficult if not impossible for most people to live off of the monthly Medicaid income allowance after satisfying the spenddown requirement.  

Fortunately the Community Medicaid rules permit an applicant to fund their excess income into a vehicle known as a "Pooled Income Trust." Pooled Income Trusts are statutorily approved trusts that are established and operated by various charitable organizations throughout New York State.  To participate in a Pooled Income Trust, the Medicaid Applicant signs a "joinder agreement" prepared by the charity that operates the trust. Once Medicaid is approved, the participant's excess income would be transferred tot he Pooled Income Trust and held in a separate trust share account for the participant's benefit. Each month the participant (or often their representative, such as an agent under a power of attorney) may submit bills incurred by the participant for household expenses such as rent, food, clothing, utilities, etc.  The Pooled Income Trust Trustee is authorized to pay any such non-medical bills that are incurred by the participant. To the extent that after payment for such expenses the participant has excess income, such income will remain part of the Pooled Income Trust, and can be used towards the charitable purposes of the organization administering the Trust.


Friday, January 17, 2014

Essential Estate Planning for Young Adults

As my daughter gets ready to head back to college after her lengthy winter break, I made sure she took care of one essential piece of business in between her relaxation and spending time with friends. Earlier this week I had her stop in to the office to sign a financial power of attorney, health care proxy, living will and HIPAA authorization.

Once your children turn 18, a parent no longer has the right to administer a child's bank accounts or other financial transactions without a power of attorney, unless the parent is jointly titled on the account. Even then, the prudent course is to have the child execute a broad financial power of attorney to enable the parent to handle any and all of the child's financial matters if the child is unable to do so.

 Perhaps even more important is the execution of the various health care documents. It is important to have a conversation with your young adult child about their preferences for end of life care, and to ensure that the child appoints someone (most likely the parents) to have legal authority as health care agent to make health care decisions on behalf of a disabled child, including the final authority to terminate life support in a worst-case scenario.

The reality is that with older adults, family members are more likely to accept that providing life support for a loved-one in contravention of the physicians' recommendations is pointless. With younger adults, however -- such as the infamous Florida case involving Terri Schiavo -- in the absence of a written direction from the patient, controversy may erupt between the incapacitated person's parents and their spouse who may well have different opinions as to the appropriate course of treatment.

Friday, December 13, 2013

Cuomo Commission Proposes Significant Increase in New York's Estate Tax Exemption

A report released this month by Governor Cuomo's New York State Tax Relief Commission recommends, among other forms of tax relief, that New York's estate tax exemption -- which is presently the same $1 million per person exemption that was in effect in 2000 -- be increased to the current federal exemption amount of $5.25 million, indexed for inflation, and that the top rate be lowered to 10% for amounts in excess of the exemption.

This would be a welcome change, as it would impose estate tax obligations on only the largest estates, and would simplify estate tax planning for New York residents.  The proposed exemption increase would also help stem the tide of New York residents seeking to establish residency in lower tax states which either already have a higher estate tax exemption or, like Florida, have no separate state estate tax at all.

The full report is found here.

Thursday, December 12, 2013

Planning for Loved-Ones With Disabilities -- Supplemental Needs Trusts

With over 43 million people suffering from some form of disability in the United States, many people face the difficult challenge of assisting a disabled child or grandchild.  A dilemma often arises where the parent or grandparent would like to help enhance a loved-one’s quality of life, but not at the expense of disqualifying either themselves or the disabled person from eligibility for governmental programs such as Medicaid and Supplemental Security Income (“SSI”). Fortunately, we have at our disposal a planning tool called the Supplemental Needs Trust (“SNT”).

There are two basic types of SNT’s:(i) a “third party” SNT established and funded by a person who does not have a legal duty to support a person with a disability (i.e., a disabled adult child or a grandchild); and (ii) a “self-settled” SNT funded with the disabled person’s own assets and/or income. These trusts are specifically authorized in New York under Estates, Powers and Trust Law §7-1.12.

With a typical third party SNT, all distributions from the trust are made in the sole discretion of the Trustee (who is often the person who established and provided the assets for the trust), and are usually paid to third party providers of services to the disabled beneficiary.  If distributions are made directly to the beneficiary, such distributions may reduce or disqualify the beneficiary from SSI, Medicaid and other “means tested” government programs.

Third party SNT’s may be created either during the parent or grandparent’s lifetime (called an inter vivos SNT), or as part of their will or revocable trust, where the SNT “springs” into effect after the parent or grandparent’s death (called a testamentary SNT).Be aware that lifetime transfers into a third party SNT will not qualify for the annual $14,000 gift exclusion and will utilize a portion of the trustmaker’s $5,250,000 gift tax exemption (increasing to $5,340,000 in 2014).  However, gifts made to a third party SNT for the benefit of a disabled child or grandchild will not result in the imposition of a Medicaid “penalty period” for the parent or grandparent making such a gift, even if made within the five-year Medicaid “look back” period.

An additional benefit of a third party SNT is that the state has no right to recover any of the assets in the trust remaining after the death of the beneficiary.  All such assets may be left to other children, grandchildren or any other beneficiaries selected by the trustmaker.

A self-settled SNT operates much like a third party SNT (i.e., the Trustee retains complete discretion to make distributions of principal or income to or for the benefit of the beneficiary), but the assets funded into the trust come from the disabled beneficiary him or herself. Such trusts are often funded with settlement proceeds from a personal injury or similar lawsuit. Or, a disabled beneficiary who is able to work may divert income above the Medicaid allowable level into a self-settled SNT in order to retain eligibility for Medicaid and SSI.  Be aware, however, that use of a self-settled SNT is only viable in New York if funded before the beneficiary turns 65; if used for a beneficiary over 65, the trust assets would be considered countable resources in determining the beneficiary’s eligibility for Medicaid.

A fundamental difference between the third party SNT and a self-settled SNT is that the latter must include a “Medicaid payback” provision. That is, upon the death of the beneficiary, the local Medicaid agency must first be repaid from the trust proceeds in an amount up to the amount of the benefits provided to the beneficiary during his or her lifetime.  Assets that remain in the trust after the Medicaid payback, if any, may be left to other beneficiaries.

Also, under present law a self-settled SNT can only be created by a beneficiary’s parent, grandparent, guardian or a court, even if the beneficiary is an adult and otherwise competent to execute a trust agreement.There is pending proposed legislation in Congress that would amend the law to allow competent disabled adults to create and execute their own self-settled SNT’s.

SNT’s can be extremely beneficial to families facing the already difficult prospect of assisting a loved-one with beneficiaries. Because of the specific legal requirements for establishing and maintaining SNT’s, an experienced elder law and special needs attorney should be consulted to assist with this important planning tool.