Over the past year, Bob Mason, a nationally elder law attorney from North Carolina, has created a podcast known as the Trust Hacker. In these podcasts, Bob interviews attorneys from all over the country regarding issues effecting trusts, estates, elder law and special needs planning. Recently, I was humbled to be interviewed by him.
The link to the podcast is as follows: https://trustchimp.com/series/trusthacker/
A never ending issue facing the court system is the establishment and enforcement of an individual’s obligation to support his or her minor children. A question which should be diligently explored in this area is the enforcement of that obligation if a parent dies prior to fulfilling all of his or her obligations. A recent New Jersey case, In The Matter of the Estate of Keith O’Malley, Deceased, No. A-3560-14T1 (App. Div. June 1, 2016), has made it clear that the answer will likely not be found in the probate courts.
Keith O’Malley fathered a son out of wedlock with Renee Brozowski in August 2000. The child resided with his mother in the Albany, NY area while Keith was a resident of Spring Lake, NJ. In 2008, Keith, who was a multi-millionaire, entered into a Child Support Agreement, which in relevant part, called for monthly payments of $3,000 in child support, payment of childcare and unreimbursed medical expenses and $7,500 annual payments to an education fund. These obligations would continue until the child attained the age of 21.
On June 1, 2014, Keith died unexpectedly at the age of 36. The estate took a position that his obligation to support his son ceased at his death. In response, Renee filed an action to set aside or reform Keith’s Will as Keith’s Will disinherited his son. She asserted a variety of grounds including mistake, undue influence, lack of capacity and breach of contract. The court dismissed all of the claims with the exception of breach of contract. In doing so, it held that the trial court should ascertain whether or not the parties intended the agreement to survive death.
The key takeaway from this case is that child support and other family law agreements do not necessarily survive death. Although a court action may preserve them, it is clear such protection is not automatic. In the event one enters into an agreement for any form of alimony, property distribution, or child support, he or she should affirmatively address the survival of such obligations upon the death of the party responsible for such payments.
In 1984, Prince released what was arguably his penultimate album – the soundtrack to his semiautobiographical film, Purple Rain. This classic filled compilation was ignited by its initial track, “Let’s Go Crazy”. A phenomenal song with a phenomenal title. Yet it appears it is regrettably the theme for his estate plan – or apparently lack thereof.
Prince Rogers Nelson (a/k/a Prince) died on April 21, 2016. He was not married and his only child predeceased him as well as his parents. He was survived by his sister, Tyka Nelson and five half-siblings. His estate is apparently worth over $300 million……………………and HE DIED WITHOUT A WILL!
Per the laws of intestate administration for the State of Minnesota, Prince’s estate will be divided among all six siblings with the half siblings receiving the same share as the full sibling. That’s the easy part. Two incredible issues face the estate: (1) administration and (2) taxes. Due to the size of the estate, it is inconceivable that a family member will be appointed to serve as administrator of the estate. A corporate fiduciary will need to be appointed. As no estate planning documents or directions apparently exist, the legal fees, fiduciary commissions and other administration expenses will be massive.
The tax bill will be unfathomable. After a $1.6 million exemption, the State of Minnesota will be impose an estate tax at rates up to 16%. On tap of that, after an exemption of $5,450,000, the government will assess a tax of 40%. Without factoring the administration costs, the death taxes could approach $160 million. Although those costs can be a deduction from the taxes, they are not at a dollar for dollar value. Thus, it is conceivable that Prince’s heirs may see only 35%-40% of the value of his estate.
Certainly, virtually none of us have $300 million estates. However, whatever the size of our estates may be, they need to be preserved by proper planning. Whether or not we enjoyed Prince’s music, we certainly should agree to avoid following his example of failing to plan. Our loved ones deserve better.
Last week, in the case entitled J.G. v. Division of Medical Assistance and Health Services and the Morris County Board of Social Services, the Appellate Division of the Superior Court ruled that monthly payments from an annuity are considered solely as income for purposes of determining the rights of a Community Spouse to receive a portion of the income from the Institutionalized Spouse. In doing so, the Court stated that the purchase of an annuity from what is known as the Community Spouse Resource Allowance (CSRA) does not render the annuity an exchange of one asset for another. By deeming the payments from the annuity as income, the Court exemplifies the difference in how various forms of law treat the same issue.
In this case, J.G. and M.G. were married in 1959. Due to the effects of Alzheimer’s disease and diabetes, J.G. entered an assisted living facility in December 2008, then a nursing home in April 2011. In September 2011, a Medicaid application was submitted on behalf of J.G. The application was approved. In the approval, the agency awarded M.G. a portion of J.G.’s monthly income. It did so to allow her to meet her Minimum Monthly Maintenance Needs Allowance (MMMNA) which is a spousal impoverishment protection to insure that a spouse residing at home will receive enough income to stay in that home. In this case, M.G.’s monthly income was $1,345 and her MMMNA was calculated by the Medicaid office to be $2,484.60. So they allowed her to receive the difference, $1,139.60 from J.G.’s income before the rest of J.G,’s income was paid over to the nursing home.
M.G., who had retained $113,640 in assets as her approved Community Spouse Resource Allowance, (CSRA), purchased an annuity, in the amount of $196,729.27, with these assets and money which she received as a gift from her children. The annuity was for a term of ten years and was set to provide a monthly distribution of $1,824.38. It had been purchased but not disclosed at the time of the Medicaid application. When it was discovered one year later, the Medicaid office discontinued the monthly payment from J.G.’s income to M.G.
M.G. filed for a fair hearing. At the hearing, the Administrative Law Judge (ALJ( agreed with her position that the income payment was mostly a return of principal and that only the taxable income from the annuity should be treated as income for Medicaid purposes. After the agency rejected this decision, the Appellate Division made its determination that the ALJ was indeed incorrect.
Specifically, the Court cited 42 U.S.C.A. Section 1382a(a)(2)(B) which explicitly provides that income includes “any payments received as an annuity, pension retirement or disability benefit.” In all, M.G. was left worse by the purchase of her annuity. She could have conceivably purchased an annuity with resources that otherwise would have to be spent down prior to her husband receiving Medicaid benefits. Instead by using her CSRA to buy the annuity, she was left with no assets as the assets she had were now considered income.
Throughout our lives, many of us desire to divest part of our estate to others. There are variety of reasons for doing so including tax avoidance, protection against long term care costs, charitable inclination, and the mere desire to make family members and friends happy. However, there are often certain perils in giving away assets including capital gains taxes, income taxes from deferred assets, gift taxes, loss of government benefits and economic issues facing a gift recipient. A complicating factor in making gifts is that the laws affecting gifting and government benefits are inconsistent. Thus, one must obtain prudent advice before making significant gifts.
One of the first principles to understand is how much can be given away during lifetime. There are seven primary types of gifts: (1) annual exclusion gifts, (2) lifetime exemption gifts, (3) leveraged gifts of present interest, (4) leveraged gifts of a future interest, (5) gifts with a retained interest, (6) charitable gifts, and (7) gifts between spouses. There are certain nuances in making many of these types of gifts.
The most popular gift, over the years, has been the annual exclusion gift. Still commonly referred to as the “$10,000 gift”, it is actually a law that allows individuals to make gifts of $14,000 per person per year. This type of gift can be given to as many different people as the donor wishes. There are three exceptions or nuances to this rule. First, a donor may fund a 529 plan up to five years at a time. Thus, the donor can fund a plan with $70,000 in year one rather than spread it out over five years. This allows a donor to not only relieve his or her estate of the principal given but all the income which would have been generated on that principal as well. Second, payments for education may be made in any amount so long as they are made payable to the institution directly. Third, payments for medical expenses are exempt so long as they are made to the medical provider and to the extent said expenses are not reimbursed by insurance.
The lifetime exemption gift is a provision which allows an individual may leave an additional $5,450,000, in the aggregate, to others during his or her lifetime. These gifts arguably require the filing of a gift tax return on the 15th of April in the following year in which they were made. For example, if I made a single gift to my daughter of $64,000 to help her buy a home, $14,000 would be my annual exclusion gift and $50,000 would be reduced from my lifetime exemption. So upon my death, I would only be able to leave $5,400,000 tax free. However, I would not have to pay a gift tax now.
The third gift is what is called a leveraged gift of a present interest. Historically, the most common gift of this type was a limited interest in a family limited partnership. For example, if a father owned a farm, he or she would transfer the ownership of same into a partnership. The father would become a general partner which would mean he would control the farm until he died if he wanted to do so. He could transfer almost all of his economic interest in the farm to his children as limited partners. Limited partnership would give the children an immediate interest as owners. However, because they have no control over the business and cannot typically sell their interests while their father is alive, the government recognizes the argument that the value of the gift is not the same as a simple gift of cash with no strings attached. As such, for example, if the father gave away, $600,000 of limited partnership interests to his children, the gift may be able to be discounted by 20%, or $120,000. Thus, the countable part of the gift, for tax purposes, would only be $480,000. The benefit of this gift is that the discounted portion escapes the donor’s estate gift tax free. Similar gifts can be set up in limited liability companies and closely held corporations.
The fourth gift is what is called a leveraged gift of a future interest. This gift is similar to the leveraged present interest gift in that it allows a discount to be taken on the value of actual gift made. The typical structures used for these are Qualified Personal Residence Trusts (QPRTs), Grantor Retained Annuity Trusts, (GRATs), and Grantor Retained Uni Trusts (GRUTs). For example, in a QPRT, a mother could give away her beach house to a trust. By retaining the right to live there for a period of years after the gift, the value of the gift can be discounted as there is an economic value to that right and because the children do not receive the right of ownership until the future (i.e. the expiration of the period that the mother can live in the property).
The last three gifts are pretty straightforward. A gift of a present interest in which a donor retains a right to the property occurs most typically in conveyances of real property in which a parent gives away a home to his or her children, but retains a life estate (i.e. the ability to live in the property until death). Gifts between spouses are generally unlimited without gift tax consequences, thus being exempt from the annual exclusion and lifetime exemption rules. Many gifts from charities are likewise exempt without limitation.
The next part of this article will explore other areas of gifting including capital gains and income tax ramifications.
In two recent cases, courts in Alabama and New York have deemed that the assets in Special Needs Trust which they have reviewed are available resources and must be spent down entirely prior to the beneficiaries of same receiving Medicaid or other needs based government benefits.
In Alabama Medicaid Agency v. Hardy (Ala. Civ. App., No. 2140565, Jan. 29, 2016), an Alabama Appeals Court ruled that a Medicaid applicant’s special needs trust was an available resource because it allowed for distributions to the beneficiary for her “health, support and best interest”, and allowed that same could even be made directly to her for these purposes. The fact that the trust specifically stated its intent to be a special needs trust and to avoid the disturbance of any entitlement to public benefits was irrelevant. The Court stated that the mere right to have distributions made directly to the beneficiary made the trust assets available.
A similar decision was made by a New York Appeals Court. (In the Matter of Frances Flannery v. Zucker (N.Y. Sup. Ct., App. Div., 4th Dept., No. TP 15-01033, Feb. 11, 2016). In that case, the trust once again asserted the intent to be a special needs trust. However, the language allowed for payments to the beneficiary for “health, maintenance and welfare.” Thus, the Court upheld the State’s denial of Medicaid benefits to the trust beneficiary.
It should be stressed that the courts are not invalidating Special Needs Trusts in their entirety. However, these cases highlight the need for such trusts to be drafted properly by competent counsel. The language used in the trusts cited in the New York and Alabama cases fall under what is known as the HEMS (health, education, maintenance and support) standard. The use of HEMS language renders a trust as a support trust. Stating that a trust is a special needs trust does not negate the effect of this language. The courts are clearly stating that you can’t have the cake and eat it too – it’s either a support trust or a special needs trust. It cannot be both. Moreover, funds cannot be paid directly to a beneficiary for any purpose whatsoever. Trust terms must be clear that payments are for goods and services to third parties.
These cases are part of a line of cases in which special needs trusts are being successfully attacked. These follow up on other cases which voided the trusts for improper distributions. Thus, in order to protect beneficiaries with special needs, trusts for their benefit must be carefully drafted and implemented.
Jean M. O’Mealia died on April 21, 2014. She was predeceased by her husband, William Francis Xavier O’Mealia (“Francis”), who died on July 13, 2001. The couple had been married for thirty (30) years. It was the second marriage for both. They had no children together. Each had children from a prior marriage.
Upon her death, Jean’s Last Will and Testament of October 4, 2007 was admitted to probate. In relevant part, it distributed her entire estate to her children. This included the marital home which she shared with her husband.
Francis’ family filed a contest to claim one-half of the marital residence for Francis’ children and grandchildren. Although the house was owned entirely by Jean, and Jean’s Will directed the disposition of her estate, Francis’ family argued that there was a contract to provide for their side of the family upon Jean’s death which superseded the terms of the Will. The Court agreed.
In 1999, Francis transferred his interest in the marital home to Jean shortly before he filed for bankruptcy protection. A Will was executed by Jean at that time although no original or copy would be found after Jean’s death. In 2000, Jean executed a Codicil to that which stated that she would leave one-half of the marital home to Francis’ family if Francis predeceased her. In doing so, she stated that she would not revoke her Will. She contemporaneously executed a document known as an Affidavit and Agreement confirming same.
Pursuant to N.J.S.A. 3B:1-4, “A contract to make a will or devise, or not to revoke a will or devise, or to die intestate, if executed after September 1, 1978, can be established only by (1) provisions of a will stating material provisions of the contract; (2) an express reference in a will to a contract and extrinsic evidence proving the terms of the contract; or (3) a writing signed by the decedent evidencing the contract.” In this case, the first two possibilities were not established as the 1999 Will could not be found and the 2000 Codicil did not refer to a contract.
Francis’ family asserted that the Affidavit and Agreement satisfied the third possibility as it was evidence of the contract in question. Jean’s family argued that this document did not establish a contract because it was not executed by Francis. However, the Court found that the there is no requirement that the agreement be signed by both parties. It cited N.J.S.A. 3B:1-4(3) which only mentions that the writing be signed by the Decedent. In addition, the Court noted that Francis was aware of the agreement as testimony established that he provided a copy of the Codicil to his family. It is clear that the Court inferred that an agreement existed as Francis had conveyed his interest in the marital home at the time the 1999 Will was executed.
In all, this case is significant in that it shows a Court willing to view extrinsic evidence as elements of a contract that could supersede a Will. Although a Will normally provides for the disposition of an individual’s probate assets, it is clear that a Will is nevertheless subject to the terms of a valid contract. Thus, proper estate planning must address not only the desires of a testator but any obligations by which he or she is subject.
The child caregiver exemption is an important exception to the five year lookback rule in Medicaid planning. For many years, it has allowed children to retain the homes of parents for whom they have provided long-term care. However, the ability to qualify for this exemption is being severely limited.
The New Jersey Appellate Division recently held that Medicaid’s child caregiver exemption is inapplicable when a child’s care for his or her parent is ancillary to Medicaid-funded homecare. Estate of G.B. ex rel. M.B.-M. v. Division of Medical Assistance and Health Services, (N.J. Super. Ct., A.D., No. A-5086-12T1, Sept. 15, 2015).
Under the caregiver exemption, an institutionalized individual may, without penalty, transfer his or her equity interest in a home to a son or daughter: (1) who was residing in the home for a period of at least two years immediately prior to the parent’s institutionalization and (2) who has provided care, thus permitting the parent to remain at home rather than enter an assisted living or nursing home facility. N.J.A.C. 10:71-4.10(d)(4).
In Estate of G.B., the Director of the Division of Medical Assistance and Health Services imposed an asset transfer penalty after an in-home Medicaid recipient, G.B., sold her residence to her caregiver daughter for less than fair market value. At the time, G.B. received thirty (30) hours of in-home caregiver services per week in addition to her daughter’s care. The homecare rendered G.B. the legal equivalent of an institutionalized person. The Director explained that the caregiver exemption permits child caregivers to keep the home because they provide care, which prevents Medicaid from funding long-term care services for at least two years. The Director found that Medicaid assistance, rather than the daughter’s care, was the key factor that allowed G.B. to remain in her home and avoid placement in an institution. Therefore, G.B’s daughter was not entitled to the caregiver exemption. The Appellate Division affirmed the Director’s decision, finding that the record supported the ultimate conclusions of law.
Begley’s Blog welcomes our newest columnist Brittany A. Verga, Esq. Brittany is an associate in our Trusts and Estate Department as well as Business and Health Care groups. We look forward to many more contributions like this one.
All of us want to make sure we keep important original documents. Problems certainly can arise if one loses bonds, stock certificates or their Will. However, one document which can be lost without any negative repercussion is a Deed.
When an individual takes title to a home, his or her deed is recorded in the County in which the property is located. Although the original deed is returned to the property owner after it is recorded, the ownership of the property is preserved even if the deed is lost.
Unfortunately, there are groups which are running scams telling people they need to get a “Current Grant Deed” and a “Property Assessment Profile”. If you call or send them payment online, they will give you a “certified” copy of your deed and information re your property. All for $83. THIS IS A SCAM!
Deeds are a public record. Most can be obtained online at no charge. A copy can be made from the county office for a fraction of the cost. The property information supplied can be obtained free from one’s township and the internet.
One of the biggest offenders is a group called Record Transfer Services. These low lifes are based in Westlake Village, California. What they provide is garbage. If you see solicitations like this from any outfit, discard same. Avoid the waste of money.
Pre-nuptial agreements have been around for many years. Historically, they have rightly been viewed as a creation to provide assurance to individuals about to enter marriage that their assets would be protected in a manner they deemed fit in the event of a divorce. To some extent, there has often been attention provided to the issue of couples who had children from previous marriages. Over the past few decades, though, the pre-nuptial agreement has become an ever increasingly important estate planning tool.
Case in point: Harold and Mildred, both in their mid-70s and widowed, met one another, fell in love and got married. Both had adult children from their previous marriages. Except for a small joint checking account to pay household bills, they maintained their assets in their own names and their Wills left their assets to their respective children. Principled as they were, they swore that they would not make a claim against each other’s estates when either of them would die.
After 15 happy years of marriage, Mildred died. Although all of their friends knew that Harold would have honored his promise not to make a claim for any of Mildred’s assets, he was now mentally incapacitated. Harold’s daughter, Madge, felt otherwise. She was Harold’s agent under a general durable power of attorney which Harold had executed and delivered to her.
Using the power of attorney, she filed an action against Mildred’s estate for what is known as an elective share. As a Harold and Mildred were happily married, there was no defense to this action. In short, Harold’s daughter was legally able to claim one-third of Mildred’s estate away from Mildred’s children.
Because of situations like these, it is imperative for couples who marry later in life to consider a pre-nuptial agreement. A properly drafted pre-nuptial agreement can define what rights, if any, a surviving spouse has against the estate of their deceased husband or wife. Often, the agreement is drafted so that both spouses will waive any right to the other’s estate. Such an agreement does not prohibit one spouse from providing for the other economically. It removes the expectation of any more than what the agreement provides, if anything.
For such agreements to be valid, they need to be properly drafted. In doing so, they need to meet at least two criteria. First, there must be full and accurate disclosure of each party’s assets and liabilities. Second, both sides must be provided with the right to have the agreement reviewed by independent counsel. If these criteria are met and the agreement is intelligently drafted, couples can enter a marriage in which their estate planning wishes can be respected.
