Trusts, Estates and Succession

As wealth accumulates in this country and our population continues to age, the propriety of lifetime giving has increased. Gifts can be made out of sheer benevolence, but are also important in minimizing death taxes and long term care costs. This blog will review some of the key concepts involved in lifetime giving.

Gifts can be made by one of three sources: (1) an individual, (2) an agent under a durable power of attorney, and (3) a guardian. Gifts are made for a variety of reasons including, but not limited to, the desire to minimize estate taxes, the desire to minimize exposure to long term care costs, and simple benevolent intent.

When an individual makes gifts, which are subsequently disputed, the two main causes of action are lack of donative intent and undue influence. Many of the other grounds that can be utilized in a will contest, such as fraud, forgery, duress, and coercion, can be asserted as well.

The standard for donative capacity is generally seen as broader than that for testamentary capacity. The courts of the State have held that improvident giving may be construed as indicative of mental incapacity (See Pascale v. Pascale, 113 N.J. 20 (1988)). A reading of Pascale indicates that valid gifting must have four elements: (1) an act constituting actual or symbolic delivery of the subject matter of the gift, (2) an intent to give, (3) an acceptance of the gift, and (4) the donor’s relinquishment of ownership and dominion over the subject matter of the gift. Contests to set aside lifetime giving should reflect, where applicable, that the donor could not meet this test.

Undue influence can be raised as to lifetime giving as well. In a will contest, a presumption of undue influence arises when both a confidential relationship exists as well as suspicious circumstances. In the case of lifetime gifts, this presumption arises when there is a confidential relationship and a person in that relationship has gained an advantage due to that confidence. (See In Re Dodge, 50 N.J. 192, 227-28 (1967); Pascale v. Pascale, 113 N.J. 20 (1988)).

(a). Gifts by an Individual
When an estate planning attorney is assisting an individual in lifetime transfers, the same precautions utilized in screening testamentary capacity and undue influence in a will contest should be utilized. If litigation arises, the attorneys contesting or defending the gifts should explore the records of the estate planning attorney to ascertain whether or not any of these steps were taken.

(b). Gifts by Agents Under Powers of Attorney
Theoretically, gifts can be made under a power of attorney. However, there are a number of concerns which should be analyzed. First, the right type of power of attorney needs to have been executed. Specific powers, such as banking powers of attorney or real estate powers of attorney, do not cover gifting and thus cannot be used. Gifting should be acceptable if a general durable power of attorney is properly prepared. However, the mere fact that a document known as a “power of attorney” or “general durable power of attorney” is executed does not mean that gifting is allowed. In addition, the law generally prohibits self-dealing by individuals acting as agents under such powers.

When preparing a power of attorney, an attorney should carefully draft powers regarding gifting or creation of trusts on behalf of the principal. Such powers should discuss not only the fact that gifts can be made, but to what extent, for what purpose, and to what class of donees. Since spouses and children are typically the agents under such powers, the document should relieve the prohibition against self-dealing.

The aforementioned level of detail should be analyzed when an individual has gifted under a power of attorney. The general position of the Internal Revenue Service, which has been supported by case law, is that gifts for tax planning purposes cannot be undertaken under a general durable power of attorney unless specific language is included. As such, litigating attorneys should be reasonably able to assert that the absence of such provisions in a power of attorney used for gifting should void said gifts.

(c). Gifting By Guardians
Guardians frequently believe they have unlimited power. However, their authority to act is limited by the courts. It is possible that a guardian may be able to make gifts. However, gifting by guardians is clearly subject to two specific sets of rules. First and foremost, the statutory law of this State clearly mandates that gifting must be made pursuant to an order of the court. N.J.S.A. 3B:12-49 and 3B:12-50 clearly indicate that the court holds jurisdiction over transfers of the ward’s property. In addition, N.J.S.A. 3B:12-58 clearly states that gifting can be done only so long as the guardian can demonstrate to the court that the ward will be protected and that the individuals or entities which would be receiving gifts are the objects of the affection of the ward.

Second, any gifting must be made pursuant to the requirements of In Re Trott, 118 N.J. Super. 436 (Ch. Div. 1972). The Trott case, in relevant part, states that any gifting must be made proportionate to beneficiaries under the ward’s existing will or dispositive plan. In the absence of a will, trust, or other dispositive writing, the gifts will be made pursuant to the intestacy statute.

Note: The foregoing discusses the authority for gifts to be made by or on behalf of an individual. However, gifting is subject to laws effecting ordinary income, capital gains and gift taxes as well as issues regarding the propriety of making gifts to individuals who may have challenges such as special needs, marital problems and an inability to manage money. Thus, these concepts need to be addressed prior to gifts being made.

Muhammed Belal Hussain died on March 10, 2013 with a will, which left 50% of the residuary estate to the Hussain Family Foundation, 25% to the decedent’s surviving brothers, and 25% to the decedent’s surviving nieces and nephew. The Foundation did not exist at the time of the decedent’s death. The attorney who drafted the will advised the decedent that if the Foundation was not formed, the gift would lapse and the intended bequest would pass to the other beneficiaries. Subsequent to the decedent’s death, the Foundation was incorporated and the executor of the estate admitted that he expected to run and be paid by the Foundation. The petitioner, the decedent’s brother, asked the Court to find that the residuary bequest to the Foundation failed because the decedent never established the Foundation.

Cy pres is an equitable legal doctrine under which a court may reform a written instrument with a gift to a charity as closely to the donor’s intention as possible so that the gift does not fail. The petitioner argued that the doctrine of cy pres was inapplicable because such doctrine only should be invoked to modify the exact terms of a will to effectuate a general charitable purpose. Petitioner further argued that the will did not have a general charitable purpose, and even if the will had such purpose, the extrinsic evidence indicated that the decedent changed his mind.

The respondent executor argued that the Court could glean charitable intent from the will as a whole, the decedent’s visits to an orphanage in Bangladesh, and an earlier holographic will from 2006 which included charitable benefit wishes.

In light of the extrinsic evidence, the Court could not find a general charitable purpose, and instead found the cy pres doctrine to be inapplicable. In making its determination, the Court cited the fact that the decedent knew that the gift to the Foundation would lapse if the Foundation was not formed. The decedent was aware of this fact for four years and chose to not take action. In further support of its holding, the Court noted that the decedent only participated in modest charitable giving during his lifetime, but never enough to deduct the amounts from his tax returns. The Court explained the result may have been different had the will included more specifics as to the charity. Because the gift failed, the bequest to the Foundation passed to the other residuary beneficiaries. Thus, it is important that clients understand the implications of naming an unformed charity in their estate planning documents.

Questions regarding this article may be sent to Publications@Capehart.com.

Ten years ago, the landscape of asset protection or Medicaid planning changed dramatically with the passage of the Deficit Recovery Act (DRA) of 2006.  In relevant part, this act impeded prudent estate planning for individuals seeking to secure their assets from long term care costs by expanding the lookback period for gifting from three years to five years, and by deferring the calculation of any period of ineligibility so that it would not run until an individual’s assets were depleted.  It effectively created a minimum 5 year penalty for gifting which eliminated many of the middle class families whom both parties stress they are “looking out for” from even a modest amount of asset protection.

One protection which arose from this law, though, was what is known as a Medicaid annuity.  In essence, if an individual enters into a nursing home, his or her spouse who is remaining in the community, can keep the home, a car, and one-half of the liquid assets not to exceed $119,200.  However, if that spouse owns an Individual Retirement Account (IRA), he or she can convert same into an annuity, and keep that as well.

In order for the annuity to be accepted as exempt from being spent down for Medicaid eligibility, it must meet a variety of criteria.  It must be irrevocable, non-assignable, with immediate payout and actuarially sound among other requirements.  Over the past decade, many such annuities have been established and accepted by state Medicaid offices.

Over the past year, however, judicial intervention was necessary to avoid attacks by the States on this valid form of asset protection.   In 2010, Donna Claypoole entered a nursing home in Pennsylvania.  When her husband applied for Medicaid on her behalf, the Pennsylvania Department of Human Services denied the application stating that annuities were countable assets and must be spent down.  The U.S. District Court, on appeal, upheld the State’s determination declaring annuities “sham transitions”.

Fortunately, the Third Circuit reversed this decision. Zahner v. Sec’y Pa. Dep’t of Human Servs., 802 F.3d 497 (3d Cir. 2015). In doing so, it noted that Congress created a safe harbor under which certain annuities are not to be counted as resources in determining Medicaid eligibility.  The annuities purchased by the Claypooles qualified for this protection.   Thus, Medicaid annuities remain a viable asset protection technique.