Pre-Paid Funerals - Buyer Beware?

Over the weekend the Wall Street Journal ran When Prepaid Funeral Plans Are Wealth Killers subtitled "Long Pitched to People of Lesser Means, the Controversial Deals Are Going Upmarket—and Now May Carry Bigger Risks".

Prepaid funerals at the heart are just what they say - you pay now for your funeral upon your death. Elder Law attorneys commonly advise clients who have a loved one in a nursing home and are spending down all their assets to consider purchasing a prepaid funeral.  The expense of a funeral will exist for the family whether their loved one has assets or not - such as in the case of a person who has needed spend down all their assets to qualify for Medicaid to pay for their long term care needs. The purchase of an irrevocable pre-paid funeral is a permissible spend-down before applying for Medicaid.  For many, it is a sensible choice to prepay the $10,000 a funeral averages than to pay another month privately to the nursing home - it is not as if a person who has qualified for Medicaid will have an estate with assets to pay the funeral costs.

A key point is that the payment must be made to in irrevocable funeral trust in New Jersey so that the amount of the prepaid funeral is not "countable" and thus must be liquidated and spent down before Medicaid can be qualified for.  Compare this to a "funeral insurance" life insurance policy, which is a countable asset for Medicaid purposes, and thus potentially must be liquidated and spent-down before a person qualifies for Medicaid.

The article takes issue with situations of potentially unscrupulous sales of pre-paid funerals, whether into trusts where the assets weren't there at the end, or the family didn't get the services they thought they paid for, or they ended up paying more in insurance premiums than the value of the policies.  It notes that " In November, New Jersey started requiring cemeteries to deposit all of the prepayments they receive for burial services into a trust fund for safekeeping."

Notwithstanding that a person always needs to be aware of the "small print" on any large purchase, prepaid funeral will remain in the Elder Law attorneys arsenal, and are a good solution for families who find themselves in a position of potentially having no estate to pay funeral expenses.

What's Cooking with the Estate Tax

Senators in Washington are stirring the pot about what to do about the federal estate tax, but as NASDAQ reports, no consensus is near. Options in play:

  • Do nothing - The federal estate tax return in 2011 with a $1 million per person exemption and a 55% rate.  Sen. Casey (D. PA) commented "I think it would be a big mistake when everyone's yelling about spending and deficits to let a lot of very wealthy people get off the hook,"


  • Obama Administration Proposal - Permanently fix the estate tax with a $3.5 million exemption and a 45% tax.  This would mimic the tax in place for deaths in 2009.  This would be a tax cut as the revenue from the 2011 tax law change is already in the budget, and the tax loss dollars would need to be replaced by other taxes.


  • Lincoln-Kyl Proposal - Starts with the Obama administrations proposal in 2011 but then "gradually phase down to a 35% rate and a $5 million exemption level."  Note that one of the ways the estate tax reduction would be paid for is by eliminating the deduction of state estate tax paid, which would significantly increase the total tax due on deaths of New Jersey residents.

What is clear is that nobody involved with the discussions are currently having to deal with the uncertainties all of this has created in helping the actual taxpayers who wish to put a plan into place, or who have suffered deaths of family members in 2010.


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User's Guide to Health Care Reform

AARP has put out a comprehensive and user friendly Guide to Health Care Reform that everyone should take a look at.  Regardless of what you think about the new health care legislation, the fact is that it will effect you - as an employer, a parent, a student, a worker or a retiree.  The reality of the health care legislation is further clouded by hype and various effective dates over the next 10 years.

So grab a cup of coffee, tea or water and skim through the User Guide.  Among lots of other useful information, you will find Five Things in the Law That May Surprise You;  and answers to questions if you are one of the 45 million Americans currently on Medicare.  The Guide is a "Must Read" and I encourage everyone to make time to become informed.

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Some States Provide a Fix for Deaths in 2010

Now that May of 2010 is upon us and there is still no federal estate tax finality, we can begin to look at the situations that families are facing where loved ones have passed since January 1.  A key issue is that their estate planning documents (wills or trusts) may not make sense in 2010 where there is no estate tax.

For example, a common provision in a Will if a person has a taxable estate is  "I leave my trust an amount equal to my applicable exclusion amount" - what does that mean?  Well, in 2009 "applicable exclusion amount" was loosely translated to $3.5 million. In 2011 "applicable exclusion amount" will loosely translate to $1 million.  In 2010 "applicable exclusion amount" has no meaning - it is a defined term under section 2010 of the Tax Code   which section does not exist this year (OK -  I am just now seeing the irony that a tax section that has no meaning in the year 2010 is section 2010).  The best was this was explained to me was "What if you had a Will that said it should be interpreted under the laws of the Soviet Union - there is no Soviet Union anymore, so what does that mean?"

Some states have come to the rescue and passed laws that say that where there is ambiguity in how to interpret a Will due to the 2010 repeal of the Federal Estate Tax, that the terms should be interpreted as if the person died on December 31, 2009 (when the estate tax was still in effect, so all the tax "terms of art" have meaning).    Julie Garber at reports:


To date it appears that at least four states have actually passed laws designed to put the estate plans of people who die in 2010 in the same position as if they had died on December 31, 2009: Indiana, Maryland, Virginia, and Wisconsin. Note that all of these laws have been written to become void if Congress acts to bring the federal estate tax back in 2010.

For those of us in New Jersey where there is no legislative solution, a quick fix is to have an amendment done to your documents to address how they should be interpreted if there is a death in 2010.



State Death Tax Chart

In doing some client research I came across a great resource "State Death Tax Chart" published by the law firm McGuire Woods.  State death tax can be relevant no matter where you live, because it could apply to:

  • Real estate you own in another state
  • The consequences for beneficiaries who reside in another state
  • Where you may want to consider relocating your residence to
  • Questions about a parents estate who lives somewhere else in the country

The chart is updated through March 2010.

New Incentives to Retire Early - Government will offset Employers Paying Continued Health Care Costs

The Obama Administration reports today that they will subsidize employers who are providing medical benefits to "early retirees".  The issue is that Medicare kicks in at age 65.  Given the costs of private health insurance, older, and sometimes most highly compensated, employees are delaying their retirement because they can't afford to fully privately pay health care until age 65.  In order to incentivize these employees to retire early, a practice had been for an employer to continue medical coverage until age 65.  However, upward spiraling premiums have made this practice potentially uneconomic.  So here we are, employees can't afford to retire due to health care costs, and employers can't afford to offer retirement packages due to health care costs. 

The proposed solution is that is employers will now have an opportunity to be reimbursed for some of the health care premiums they add to retirement packages.  At its heart then, this is a job stimulus measure.  If older more experienced employees retire, it creates room for mid-level employees to move into new jobs (presumably at a lower salary) and frees up lower end opportunities for those out of work or moving into the workforce.

Effective next month, federal subsidies will allow employers to recoup a big chunk of the cost of medical claims for retirees ages 55 to 64 not yet eligible for Medicare, according to a White House official who spoke on condition of anonymity ahead of the official announcement expected Tuesday.


2010 Tax Basis Rules and Medicaid Planning - What happens to my Life Estate?

The estate tax changes in 2010 are not only playing havoc with estate plans, but asset protection planning for those concerned with long term care costs as well. I came across this informative article "Which Pre-2010 Medicaid-Oriented Transfers of Homes Get a Step-up in Basis under the Modified Carryover Basis Rules?" by Massachusetts attorney Brian E. Barreira.

For deaths in 2010 there is not an automatic step up in basis (see my prior post on the impact of 2010 estate tax law changes on basis).  Instead, a decedent' estate can add $1.3 million (for a single person) or up to $4.3 million (for a married person) to the basis of inherited assets.  Brian describes the situation as follows:

Under the applicable 2010 tax law, known as the modified carryover basis rules, an estate can opt for a step-up in basis for certain assets, and to see whether these are eligible, Internal Revenue Code section 1022 applies. The most common types of transfers of the home that were made for Medicaid planning purposes in the past were (1) joint tenancy with right of survivorship, (2) a reserved power of appointment in a deed, (3) an irrevocable income-only trust, which often includes a reserved power of appointment, and (4) a reserved life estate, use-and-occupancy agreement or informal understanding. To qualify for the step-up in basis, an asset must be owned under Section 1022(d) and acquired under Section 1022(e), so each type of transfer must be analyzed.

Internal Revenue Code section 1022 (d)(1)(B)(i) allows at least a partial step-up for some joint tenancies; (d)(1)(B)(iii) denies the step-up for a reserved power of appointment, presumably only in a deed. Section 1022(e)(2)(B) allows the step-up for some irrevocable trusts, including a power to alter or terminate the trust, which would seem to include a reserved power of appointment in an irrevocable trust. "

Brian cautions however that a transfer with a reserved life estate may have a different result for deaths in 2010:

It has been questioned whether a life estate is entitled to a step-up in basis. Several blog commentators have written that a life estate is not eligible for the step-up, but many of them seem to be parroting each other and not displaying their analysis. Section 1022(e)(3) seems to include a reserved life estate but not a use-and-occupancy agreement or informal understanding. The language in (e)(3) includes “property passing from the decedent by reason of death to the extent that such property passed without consideration,” and where the property passes to the remainderpersons upon the life tenant’s death, that description could include a reserved life estate. Further, under Massachusetts law, the life tenant has exclusive possession of the entire property during the life tenant’s lifetime, and may therefore fit the ownership test in Section 1022(d). Thus, it appears to me that a Massachusetts life estate can be eligible for a step-up in basis."

NAELA (National Association of Elder Law Attorneys) is currently seeking guidance from the IRS that basis under Section 1022 can be allocated to property transferred as a result of a life estate.  

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