New Credit Card Protections for Consumers

Starting today (February 22, 2010) all credit card companies must comply with new consumer protection rules issued by the Federal Reserve Bank.  Among these rules:

1. You must be given 45 days notice before an

  • increase in interest rate
  • change to annual fee, late fee, cash advance fee, etc.
  • other significant changes to the terms of your account

2.  Your monthly bill must show how long it will take to pay off the balance if you only pay the minimum monthly fee in a clear chart (i.e. you owe $3000, the monthly minimum is $90 at 14.4% - it will take 11 years and cost you $4745).

3.  No interest rate increases for the first year of the card

4. Rate increases only apply to new transactions, not existing balances

5.  Over the limit transactions will be restricted unless you advise your credit card company otherwise

6. Applicants under 21 must be able to demonstrate they can make payments (instead or luring in college students who have no source of income and then forcing them to declare bankruptcy)

7.  Standard payment dates and times 

8. Payments must be applied to higher interest balance

 

 

Thanks to Tonya R. Coles, Esq. (via Facebook) for sharing this important news).

 

 

Disclaimers - Saying "No" to Your Inheritance

The New York Times ran an article this week "Saying ‘No Thanks’ to a Bequest".  In the article, Deborah L. Jacobs explores how a disclaimer provision either included in an estate plan, or created after death, can achieve some estate tax savings in this environment of uncertainty about the federal estate tax this year or next.

In an estate plan a "Disclaimer" is when a beneficiary says "No, I don't want that part of my inheritance."  Now, why would a person not want an inheritance?  Well, for a spouse, a disclaimer is used more accurately to say "I don't want to take my inheritance outright, and therefore it should pass to a trust where I am a beneficiary." This trust could capture the exemption amount from federal estate taxes if and when the federal estate tax comes back.  A disclaimer creates flexibility in a period of uncertainty as the spouse doesn't have to decide now if it makes sense to fund the trust, they can wait and see what the tax laws are at the time the first spouse dies.

The article outlines how a disclaimer works, the benefits of disclaimers (flexibility being key) and some of the drawbacks (what if the spouse doesn't disclaim, or accepts the assets so they can't disclaim).  However, I think the article misses one key point about how using disclaimers to create trust can create inflexibility.  If a person sets up a trust in their Will and directs that it be funded (i.e.: put $1 million is this trust) instead of allowing it to be funded through a disclaimer (i.e.: I spouse disclaim $1 million which will now pass to a trust), then the trust can give a person a "Power of Appointment" over the trust.  

A "Power of Appointment" essentially allows a person to change who gets the trust funds and how after the death of the decedent.  This is incredibly powerful in using a trust.  A trust will last for years or decades after your death.  Unless you have a crystal ball, you don't know what will happen to your beneficiaries, or what the tax laws will be in the future.  By setting up a trust for your spouse and children, and giving your spouse a Power of Appointment, your spouse has the ability to change how your children eventually get your assets after your spouses' death.  For example, if a child has a health issue, your spouse can change the trust to leave more to that child, or to leave it to the child in trust instead of outright.  Without the Power of Appointment the child might get money that would negate other benefits he was receiving.

So how to balance the flexibility of a disclaimer with the flexibility of a Power of Appointment? In New Jersey, where we have a state level estate tax of $675,000, we recommend a "3-Part Will".

  • Part 1 - An amount equal to $675,000 goes to a family trust with a power of appointment in favor of the surviving spouse
  • Part 2 - An amount equal to the difference between (1) the federal estate tax exemption amount (if any) and $675,000 go to the spouse - the spouse can disclaim this amount to a family trust if it makes sense from an estate tax perspective
  • Part 3 - The balance to the spouse  

 

Life Estates - Estate Tax and Inheritance Tax Consequences

Life estates are commonly used in elder law asset protection planning.  Mom owns a house worth $400,000.  She gives the house to her children(a "remainder interest"), and keeps the right to live in the house during her lifetime (a "life estate interest").  The gift of the remainder interest is "transfer" for Medicaid purposes, and starts the clock on the 5 year lookback period.  

The gift of the house subject to a life estate is a popular asset protection planning technique because it is easy to understand and less invasive to lifestyle than other transfer techniques. Making a gift of a remainder interest simply involves the attorney preparing a deed and associated real estate transfer documents.  There are no realty transfer tax consequences - realty transfer tax is not assessed in New Jersey for transfers without consideration (i.e.: a gift). Also, using a life estate technique not much changes from a practical perspective as the life estate holder (ie: Mom) continues to be responsible for all property taxes, maintenance and upkeep - and is still entitled to the Senior property tax rebate.  Perhaps most importantly, you don't spend your house, so it is emotionally easier to give away an interest in a house than to give away cash dollars that you may still want to spend.  For those who think they are at least 5 years away from a nursing home, a transfer of a house subject to a life estate can be a home run as the house tends to be the most valuable single asset.

But what happens from a tax perspective when the owner dies? (Assuming the death is not in 2010 when we have no federal estate tax - see my prior post on estate tax implications for deaths in 2010)

If you give away an asset and keep a life estate in that asset, the life estate acts like a "string" that pulls 100% of the value of the asset into your taxable estate.  From an estate tax perspective, this mean that (1) 100% of the value of the house is included in decedents taxable estate, and (2) the cost basis of the house is "stepped-up" to the value of the house on date of death (IRC 2036).  So, if Mom bought the house for $40,000 and it is now worth $440,000, Mom's estate includes the house valued at $440,000, and kids get the house with a $440,000 basis.  When they sell the house for $450,000 down the road, then they only have $10,000 of capital gain.  The $400,000 of appreciation that occurred during Mom's lifetime essentially disappears (you potentially pay estate tax instead).  If the total estate is less than $675,000 (New Jersey) or $1,000,000 (federal starting in 2011 - unless congress changes it), then there will be no estate tax due.  If there is a New Jersey estate tax, the rate ranges up to 16% on amounts over $675,000 - this is far less than the capital gains tax (15% federal plus 7.5% NJ) on $400,000 if Mom simply gave the house to the kids without keeping the life estate.  

In New Jersey we also need to contend with the Inheritance Tax if the remainder beneficiaries are not children - for example, Aunt gives her house to her nieces and nephews and retains a life estate.  The Inheritance Tax is a separate tax from the estate tax that is assessed against a beneficiary based on their relationship to the decedents - transfers to spouses and children are exempt, transfers to other family members are not.  For example, when Aunt dies, the life estate acts to make 100% of the value of the house subject to inheritance tax (NJAC 18:26-5 et seq).  So, nieces and nephews get the house, but they need pay an inheritance tax at the rate of 15%-16% with no exemption.  The inheritance tax is a credit to the estate tax, so you don't end up paying both taxes if the estate is subject to estate tax and the beneficiaries are not children or spouses.

The benefits of making  a transfer of a house subject to a life estate can significantly outweigh any estate tax or inheritance consequences in many situations.  The key is to get advise for YOUR situation to see if transfer of a house subject to a lift estate make sense to protect your assets from a Medicaid spend-down.

Who Will Raise your Children? 12 Questions to Consider in Naming a Guardian

Naming a Guardian for minor children is one of the most challenging things to do as a parent - and the most important. While I have never taken a poll, I believe that disagreement over who should be Guardian, or a fear of angering a family member, are the key reasons why young families don't carry out their intention to make a Will.

While naming a Guardian is certainly difficult - the emotion of just to considering the idea, the enormity of influence the Guardian  will have over the children - not taking action is worse.  If you don't name a Guardian, you are leaving it to a judge who never met you and doesn't know your children to decide who raises them - trust me when I say that a total stranger deciding who will raise your children is much worse then any hurt feelings you are worried about.

While the question of  Guardianship is hard, it is one of those things that you need to do as a parent - part of the package.  Luckily, I came across this great blog post today at Jensen Law - 12 Tips For Choosing A Guardian For Your Children.  This article is a wonderful primer on how to deal with a difficult question and reach a decision.  It counters the desire to procrastinate by creating a roadmap to get to an answers.  Some ideas?  Think beyond the obvious choices - friends may be better guardians than family; focus on love and value, not wealth.

Last point - the ONLY place you can name a Guardian is in a Will. If you have children, go to Legalzoom.com to at least get a Will in place TODAY.  A computer generated Will is far superior to nothing a all.  Don't let your natural desire to avoid a difficult and unpleasant decision leave your children with no parental guidance at a time they need it most. 

Image: Dynamite Imagery / FreeDigitalPhotos.net

Top 10 Elder Law Decisions of 2009

The most important Elder Law decisions from around the country are summarized here.  Each case is relevant to New Jersey as elder law often involves Medicaid, which is subject to "supposedly uniform" federal regulation as jointly funded and administered by the federal and state governments. As a result, treatment of a question about Medicaid in one state may eventually become the law of the land in all states.  

Elderlawanswers.com has created this top 10 list from the popularity of the cases on its website - I have added topic heading and notes about what impact these cases might have in New Jersey.

 

  1. Estate Recovery - State That Has Not Expanded Definition of Estate May Still Recover Non-Probate Asset

    A Missouri appeals court finds that the state may use an accounting statute to recover Medicaid benefits from a decedent's estate even though the only asset is a non-probate asset and Missouri has not expanded its definition of estate to include non-probate assets. In Re Estate of Jones (Mo. Ct. App., W.D., No. 69310, Jan. 13, 2009).  Note that NJ has an expanded estate recovery statute so that Medicaid can have a lien against assets passing by joint ownership or a beneficiary designation when a person dies.

  2. Medicaid Annuity - Annuity Purchased to Benefit Community Spouse Is Available Resource

    A New Jersey appeals court holds that under the Deficit Reduction Act of 2005 (DRA) a state may consider the value of an annuity purchased for the sole benefit of the community spouse in determining whether the Medicaid applicant is eligible. N.M. v. Div. Medical Assistance and Health Servs. (N.J. Sup. Ct., App. Div., No. A-0828-07T1, Feb. 26, 2009). See prior posting for a full discussion of New Jersey treatment of Medicaid Annuities.

  3. Promissory Note - Non-Saleable Promissory Note Is Improper Transfer

    The Ohio Court of Appeals finds that a non-saleable promissory note is a prohibited asset transfer for Medicaid eligibility purposes because the interest was deferred and it wasn't clear the note barred cancellation upon the loaner's death. Brown v. Ohio Dept. of Job & Family Servs. (Ohio Ct. App., 8th Dist., No. 92008, March 12, 2009). There is a current pending case on the question of the use of promissory notes in New Jersey.

  4. Trusts as Countable Assets for Medicaid - Trust Is an Available Resource Despite Discretionary Language

    The Minnesota Court of Appeals finds that a trust's principal and income are both available resources for Medicaid purposes even though the trust's language requires only payments of income to the beneficiary and gives discretion to the trustee to distribute principal. In The Matter of the Stephanie L. Wilcox Trust (Minn. Ct. App., No. A08-1458, May 19, 2009).  The lesson here?  Trusts must clearly specify if the assets are not available to satisfy long term care needs.

  5. Estate RecoveryProperty Owned in Joint Tenancy Falls Under Estate Recovery Rules

    A Minnesota appeals court rules that the state may assert an estate recovery claim against property that was owned in joint tenancy at the time of a Medicaid recipient's death and that flowed into her surviving spouse's estate. In re the Estate of Grote (Minn. Ct. App., No. A08-1691, June 2, 2009).  Again, New Jersey has an expanded estate recovery statute, so Medicaid can recoup money it expended against joint assets when a person dies.

  6. Trusts as Countable Assets for MedicaidIrrevocable Trust Forbidding Distribution of Corpus Is Still Countable by Medicaid

    The Massachusetts appeals court finds that although an irrevocable, income-only trust expressly prohibits distributions of principal, other provisions in the trust could conceivably permit the trustees to invade trust assets, and thus the trust is countable for Medicaid purposes. Doherty v. Director of the Office of Medicaid (Mass. App. Ct., Essex, No. 08-P-939, June 18, 2009). Again - trusts must clearly specify if the assets are not available to satisfy long term care needs.

  7. Trusts as Countable Assets for MedicaidProperty of Trust That Bars Distributions That Interfere With Medicaid Eligibility Is Available Asset

    An Illinois appeals court finds that a trust that prevented the trustee from making distributions if it would interfere with public assistance is an available asset for Medicaid eligibility purposes. Vincent v. Dept. of Human Services (Ill. Ct. App., 3rd Dist., No. 3-08-0096, June 18, 2009). Seeing a theme here? Trusts must clearly specify if the assets are not available to satisfy long term care needs.

  8. Medicaid Annuity - Community Spouse's Post-DRA Annuity Purchase Is Not an Improper Transfer

    An Ohio appeals court holds that the purchase of a post-DRA annuity by a community spouse is not an improper transfer of assets. Vieth v. Ohio Dept. of Job & Family Services (Ohio Ct. App., 10th Dist., No. 08AP-635, July 30, 2009). I expanded on this case and how it might apply in New Jersey in a prior post.

  9. Trusts as Countable Assets for Medicaid10th Circuit Reiterates: States Need Not Exempt (d)(4) Trusts From Asset Calculations

    Confirming an earlier decision, the 10th Circuit Court of Appeals rules that Congress left states free to count (d)(4)(A) and (d)(4)(C) trusts as available resources for Medicaid purposes. Hobbs v. Zenderman (10th Cir., No. 08-2099, Sept. 1, 2009). New Jersey considers so called (d)(4)(A) trust as non-countable assets so long as the State is the primary beneficiary upon death.

  10. Medicaid Annuity - Annuity Purchase by Community Spouse Upheld in Federal Appeals Court Decision

    In a much-anticipated decision, the Third Circuit Court of Appeals affirms a U.S. district court ruling allowing a community spouse to purchase a DRA-compliant annuity to protect savings from the costs of her husband's nursing home care. Weatherbee v. Richman (3d Cir., No. 09-1399, Nov. 12, 2009). I blogged about this excited development in an earlier post as New Jersey is in the Third Circuit so this case applies to our clients.

      

Image: Salvatore Vuono / FreeDigitalPhotos.net

Real Estate Tax Appeals - Filing Thresholds have Changed for 2010

Real estate tax appeals for both commercial and residential property have been a hot topic.  As the real estate market sinks, many taxpayers find that they are paying taxes on real estate due to assessments made when the value of the property was 20-40% higher.

Up to now if you wanted to file a tax appeal and property assessed up to $750,000, you would have had to have filed in the County Board of Taxation.  Now, they have changed the law so that property assessed up to $1 million must also be filed at the County Board of Taxation. 

The fear is that self service taxpayers will be unaware of the change, file in Tax Court, and then miss the filing date on the county level.  There is no "oops" defense to  missing the filing deadlines.

The law change took place in an amendment to Rule 54:3-21 through Assembly Bill 4313.  The stated purpose of this change in law is to "decrease the overburdened Tax Court's caseload and allow these cases to be heard by county boards of taxation...".

Again, the critical issue is that if a person files a tax appeal in the wrong jurisdiction, you may be considered out of time to then re-file in the correct court of competent jurisdiction.

Specific questions on real estate tax appeals can be directed to my colleague Steve Loeb, Esq. in our Tax Department.

Image: Salvatore Vuono / FreeDigitalPhotos.net

Palimony Agreement must be in Writing - Concern for Caregiving Couples

My colleague, Judson Stein, Esq. has brought be my attention a new law that came into being in the last days of the Corzine Administration requiring that in order for a palimony agreement to be enforceable it must (1) be in writing, and (2) be executed with the independent advice of legal counsel.

 Stein advises in his announcement:

“Palimony” involves the right of an unmarried participant to a marriage-like relationship to seek support benefits when the relationship ends, whether because the couple breaks up, e.g., due to loss of affection or by reason of the death of one of the participants. Case law in New Jersey had allowed such claims of support – even if based only on implicit understandings derived from the circumstances of the relationship.

Now, as a result of the new law, such a claim will not be legally enforceable unless it is set forth in a written agreement made with the independent advice of counsel. Further, as the new law applies to those in a “non-marital personal relationship”, and as the new law makes no mention of civil unions or domestic partnerships, the impact of this new law on parties to civil unions or domestic partnerships cannot be stated with certainty.

Given that many couples are not legally married (and, New Jersey does not recognize common law marriage), it is now more important than ever for unmarried couples to consider, and make provisions for, the financial consequences of the termination of their relationship – whether while both are living or when one dies. This is especially true when one of the couple is more financially dependant than the other or when their finances are intertwined.

I also find this of particular concern for caregivers.  It is not uncommon for elderly couples to be in a relationship but not married.  One reason to avoid later life marriages is that spouses are fully responsible to spend their assets towards a spouses care before Medicaid will pay for long term care.   However, a long term couple may make promises to each other with regard to sharing in the estate for caring for a person.  These agreements must now be in writing with the advice of counsel to be enforceable.  Your typical couple will not be aware of this and I question if this law could now hurt caregivers since their agreements will normally be verbally and thus while morally binding, not legally.