New Jersey Finally Updates Its Medicaid Divisor

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Attorney

As most people know, in order to qualify for Medicaid, one must have no more than $2000 in countable assets. But to get under that limit you cannot simply transfer assets out of your name, or gift them. That’s because Medicaid imposes a penalty – a waiting period actually – before one can qualify. The more money transferred or “gifted”, the longer the penalty period.

But, how is this penalty calculated? By taking the amount transferred and dividing it by the average monthly cost of nursing home care, what is commonly known as the “Medicaid penalty divisor”. New Jersey has its own divisor even though the cost of nursing home care varies from region to region within the state.

The Medicaid divisor is a key piece of information in the Medicaid eligibility picture. The lower that number is, the higher the Medicaid penalty is and the longer the waiting period for Medicaid. For New Jersey which looks to avoid paying benefits that’s a good thing since many people with penalties may pass away before those penalties expire. The State will never have to pay any benefits in that case.

As with many government laws and regulations, much is left unspoken. As the cost of care increases, shouldn’t the Medicaid divisor increase? And how often should it be adjusted? Medicaid laws and regulations don’t address that. While some states are good about adjusting the divisor to keep up with rising costs, others are not.

New Jersey has never been one to be accurate about the true monthly costs of long term care. Whether that is intentional or not, the fact remains it works to the government’s advantage, and to the huge disadvantage of many families. It had been many years since New Jersey last raised its’ divisor to $7,787 per month as its calculation of an average nursing home level of care. In some nursing homes, however, the cost of care is as much as $13,000 per month. With a Medicaid divisor that is 60% of that number, the unfairness is clear with the following example.

If I transferred $100,000 and applied for Medicaid, the penalty would be 12.84 months, meaning I would have to pay an additional 12.84 months of care at the facility’s private pay rate. Transferring that $100,000 would cost me as much as $167,000 in actual care costs.

Recently, however, because of the efforts of a number of elder law attorneys, New Jersey has reluctantly increased its’ Medicaid divisor. On a 30 day month, effective for all applications filed after April 1, 2014, the divisor is now $9,405 per month or $313 per day.   For people living in the northern part of the state, the number is still too low, but it does help. The state has not, however, committed to updating this number on an annual basis so more lawsuits will likely be necessary in the future.

So, what does it mean for those filing for Medicaid? If there are potential penalties for gifts and other undocumented transfers – or if you are unsure what is in the 5 years of records you will be handing over to Medicaid – it is still not a good idea to automatically file the application. In some cases it may make sense to file and let the state calculate the penalty and in some cases it will make sense to bring back the money and spend down – in ways most beneficial to the applicant and his/her family – before applying. And that’s where a good elder law attorney can make all the difference.

To discuss your NJ Medicaid matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

How to Use a Reverse Mortgage and Qualify for Medicaid Eligibility

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Attorney

Today many seniors find themselves burdened with debt due to the high costs of medical care, prescription drugs, and energy. Typically one’s home is their major asset. Over the last couple years, real estate values have started to increase. Older homeowners who find themselves cash strapped to meet the daily costs of living have built up equity in their home and might want to consider a reverse mortgage.

What Is a Reverse Mortgage?

A reverse mortgage is no different from other types of mortgages except that repayment of the loan does not occur until the earlier of the following events:

  • The house is sold.
  • The homeowner passes away.
  • The homeowner is absent from the home for 12 consecutive months such as if all homeowners were residing in a nursing home.
  • Someone is added to the title of the home after the loan is made.

When any of these events occur, the home is sold and the debt paid off. The balance of the equity in the home passes to the heirs of the homeowners.

How Does a Reverse Mortgage Impact One’s Eligibility for Medicaid?

The money a homeowner receives from a reverse mortgage loan is not countable as an asset or income under the Medicaid program, if set up correctly. This means that a reverse mortgage will not impact one’s eligibility for Medicaid under current law. The loan proceeds should be placed into a bank account, typically a checking or savings account tied into your checking account and used monthly to satisfy outstanding bills. The loan proceeds should not be placed into a CD or an investment brokerage account. Please note however that there are some reverse mortgage products on the market where in connection with the mortgage you take the loan proceeds and buy a commercial annuity. This is known as a reverse annuity mortgage. This type of reverse mortgage, and only this type of reverse mortgage, will impact one’s Medicaid eligibility because the income from the annuity is counted as available income and will be used towards the cost of one’s long term care.

To discuss your NJ Medicaid matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

 

 

Is it Too Late to Save on Taxes After Death: Tax Planning Options for the Executor

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Estate Administration and Probate Attorney

Once appointed by the County Surrogate, the executor of an estate has many strategic decisions to make that may impact the tax liability of both the estate and the estate’s beneficiaries. Once made, many of those decisions become irrevocable or difficult to reverse. The following is a brief overview of some of the major decisions involved in filing a decedent’s final federal income-tax return (Form 1040), the estate’s federal income-tax return (Form 1041), and the federal estate-tax return (Form 706).

Decedent’s Final Return

Internal Revenue Code Section 6012(b)(1) charges the executor (or other person entrusted with the decedent’s property) with the responsibility for filing the final income tax return for the decedent. Because most individual taxpayers file on a calendar-year basis, the final tax year will usually cover the period from January 1 to the date of death. For a calendar-year taxpayer, the return is due on April 15th of the following year. An automatic six-month extension may be obtained by filing Form 4868 and paying any estimated tax due with the extension.

If the decedent was married at the time of his death, the executor can generally file a joint return with the decedent’s surviving spouse, provided the spouse has not remarried before the end of the calendar year. If no executor or estate representative has been appointed, the surviving spouse may file the joint return on his or her own.

Generally, married couples will obtain a better result by filing jointly rather than separately. In addition to the applicable tax brackets, there may be other reasons for filing jointly. For example, the decedent may have capital gain losses that cannot be carried over to the estate income-tax return. The executor may want to file jointly if doing so would allow the losses to be used against capital gains realized by the surviving spouse. On the other hand, by filing jointly, the executor becomes potentially liable with the surviving spouse for all taxes and penalties for the final tax year. Each case will present a different set of facts for this analysis. It also raises some ethical and fiduciary conflicts if the executor declines to join in on the tax return with the surviving spouse.

Medical Expenses. Unpaid medical expenses may be deducted as a debt on the decedent’s estate-tax return or deducted as a medical expense in the year incurred if paid within one year of the date of death. Generally, if the estate is nontaxable, taking the deduction on the final return will result in the greatest tax savings. However, where the estate is using both the applicable exclusion amount and the marital deduction to eliminate estate taxes, the executor’s decision regarding where to deduct the medical expenses may affect each beneficiary differently.

Estate Income-tax Return

Because the decedent’s final tax year ends on the date of death, the estate’s first tax year begins the following day and may be for a period of less than one year.

The executor is required to file an income-tax return for the estate for each tax year in which the estate has gross income of $600 or more or if any beneficiary is a nonresident alien.

Calendar vs. Fiscal Year. Initially, the choice of which year to select to file is a consideration. The taxable year is chosen on the first return. Unlike trusts, which must use a calendar year as a taxable year, estates may choose either a calendar or fiscal year. A fiscal year may be for a 12-month period that ends on the last day of any month other than December.

In many cases, the executor will want to choose a fiscal year that ends after the close of a beneficiary’s taxable year. The reason for this is that a beneficiary is deemed to receive his or her share of the estate’s income on the last day of the estate’s fiscal year, even if the distribution was actually made earlier. Let’s see how this works.

Illustration. Decedent dies on May 15 of Year 1. The tax year of the estate’s sole beneficiary is the calendar year. By choosing a fiscal year that ends on January 31, the executor assures that any income distributed during Year 1 will not be included in the beneficiary’s income until Year 2. Thus, you can postpone the effective date when the tax is owed.

If the decedent had a revocable living trust that became irrevocable at death, an election may be made to treat the trust as part of the decedent’s estate. If the estate has adopted a fiscal year, making the election would allow that year to be used for reporting the trust’s income.

Administration Expenses and Losses. A constant question comes up concerning the decedent’s final debts and expenses. Generally, an executor can choose to either deduct estate administration expenses and losses on either the estate’s income-tax return or the corresponding estate-tax return. If the estate is non-taxable, the executor will typically want to take all available deductions on the estate’s income-tax return. However, if the value of the gross estate exceeds the applicable exclusion amount ($675,000), different considerations come to play and the analysis becomes more involved. The executor will always want to get the most value dollar for dollar on the treatment of deductions.

The Estate-tax Return

There are several important decisions an executor may need to make in connection with the estate-tax return.

Portability Election. Under the Federal Tax Code, if the estate of a married decedent is not greater than $5,340,000 as of 2014 (it’s $5,430,000 in 2015) which under federal law triggers the filing of a federal estate-tax return, the executor may still want to preserve the unused exclusion amount commonly referred to as the “DSUE” for the surviving spouse. The tax code offers an election to the estate of any decedent who was a resident or citizen of the United States on the date of his or her death who is survived by a spouse. The executor must make this election on the estate-tax return.

Executors who fail to file the federal estate tax return (because the applicable exclusion renders the estate exempt from filing) but would like to make the portability election anyway may still be able to do so. Hence, the executor of the estate may file a complete and properly prepared Form 706 for the estate within nine (9) months of date of death, plus any applicable extensions.

Alternate Valuation Date. This concept is quite valuable to understand. Generally, the assets of an estate are valued as of the decedent’s date of death. However, the executor may elect to have estate assets valued as of the date six months later or even sooner if the assets are sold, exchanged, or otherwise disposed of prior to six (6) months. To make the election, the executor must demonstrate that the election will decrease both the value of the gross estate and the amount of the estate and generation-skipping transfer taxes. Before making this election, as the executor, you should consider the effect the election will have on other available elections. In some cases, the beneficiaries may be better off financially by keeping the higher date-of-death value because it will reduce subsequent capital gains and/or increase depreciation deductions because of the higher basis utilized for income-tax purposes.

Disclaimers.  The use of disclaimers is an important tool when evaluating options in estate administration. While ultimately it is the beneficiary who must elect to make a “qualified disclaimer”, the executor will often be included in the decision and whether such election is best for the estate and the beneficiary. Timing is critical here because disclaimers must be made within nine months of the date of death. This election deadline is unrelated to the filing of the federal estate-tax return. It is based on the date of death so any extension of time to file the estate-tax return will not extend the period for making the disclaimer.

Conclusion

Proper administration of an estate requires the executor to make a number of strategic decisions — both tax related and otherwise — in a timely manner. Careful planning is essential for successfully fulfilling one’s fiduciary duties to the estate and the estate’s beneficiaries.

To discuss your NJ estate administration or probate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.

 

I love this job!

I love this job!

A recent issue of the New Yorker magazine contained an extended piece about the “Piano Man”, Billy Joel. In the article, the author described Billy Joel’s monthly sojourns from his estate on Long Island to sold-out shows at Madison Square Garden.

After performing for 20,000 enthusiastic fans in New York City, while in the private helicopter on the way home to Long Island, looking down on the views of the New York skyline and Long Island Sound, the writer quotes Billy Joel as saying “I love this job”! (Actually, Billy added an adjective—one not suitable for inclusion on this blog– to his emphasize his gratitude.)

I cannot sing or play a musical instrument.  The “venue” in which I primarily work is a small, yet comfortable conference room. I do not have an audience ready to have fun, but instead clients who are often anxious  about a situation facing them.

For example, the day after I read the New Yorker article, I met with a woman and her intelligent and devoted daughter.  My client was worried about the sudden decline in the condition of her husband and alarmed at the impact of his future illness on their financial well-being.  Her daughter was concerned about both of her parents and was there to provide support.

After an initial meeting lasting nearly two hours, the daughter turned her mother and said, “You see, Mom it is not nearly as bad as you thought it was going to be”!   The wife then raised her hand to her daughter and they exchanged “high-fives”.

As I was driving myself home that evening, I reflected that despite the vast gap in talent (plus methods of commuting) Billy Joel and I have one thing in common – we both love our jobs.

Yet another thing for which to be grateful on this Thanksgiving weekend.

This post first appeared on the Long Term Care Planning Blog on November 30, 2014.

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Mark Heffner

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The Difference Between Obamacare and Long Term Care

By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Medicaid Attorney

I am often questioned about how Obamacare has affected long term care and Medicaid. My answer is that it really hasn’t made much of an impact at all because Obamacare addresses this country’s health insurance coverage.   The Medicaid programs that pay for long term care haven’t changed as a result of the Affordable Care Act. But there is a Medicaid program that covers basic medical needs for the indigent. Because of Obamacare, more people are enrolling in the Medicaid program, NJ Family Care.

A recent Star Ledger article about Medicaid estate recovery illustrates the confusion. It talks about the prospect of having to pay the State back the benefits received from Medicaid. The State places a lien on the estate when the person dies. This is known as “Medicaid estate recovery” and is something I’ve written about previously. It is not new and it is not unique to Obamacare. Estate recovery has been the law for more than 20 years.

The Affordable Care Act is supposed to make health care insurance available and affordable to millions of uninsured Americans. It also encourages states to expand their Medicaid programs to cover some lower income citizens who can qualify.   Many are concerned that if they apply for and receive Medicaid coverage, they will now be subject to estate recovery.

Approximately 1.4 million New Jersey residents signed up for Medicaid’s Family Care program. The overwhelming majority of them are young and middle aged. Again, what they signed up for is health insurance coverage, not long term care coverage. These people are less likely to have any assets that could be subject to state liens so they should not be concerned about estate recovery.

Additionally, the amount of money being paid out by Medicaid under Family Care will most likely be much less than the benefits paid out under Medicaid’s nursing home care program. That’s because, generally, the Medicaid recipients of NJ Family Care are younger and healthier than the recipients of nursing home care, which the state pays at the rate of approximately $6000 per month. Accordingly, the potential lien will be much less.

The Star Ledger article highlights a 60 year old couple that declined to enroll in Medicaid because they feared estate recovery. If that couple is healthy and is applying under the Family Care program, a potential estate recovery lien would be minimal. The bigger problem down the road is long term care. That could be 5 or 10 or more years in the future but without planning now for what lies ahead, they could lose their entire family fortune.

To discuss your NJ Medicaid matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing consultations if you are unable to come to our office.