NJ Millionaires Tax May be back

Pot of GoldFlashback to 2009 - New Jersey households earning more than $1 million were subject to an additional tax, or amounts earned over that threshold were tax to 10.75%.  Right now, the maximum New Jersey income tax bracket is 8.97%.  That was a one-year tax proposed to close a budget gap.  NJ.com reports that the millionaires tax is back on the table:

"As the state’s top Democrats mull whether to attempt bring back the so-called “millionaires tax” in this year’s budget, one Senate Democrat has already proposed it.

State Sen. Shirley Turner has proposed a bill that would permanently raise the tax rate on households earning more than $1 million annually.

For every dollar earned exceeding $1 million, Turner’s bill would raise the tax rate from 8.97 percent to 10.75 percent. The revenue generated from the extra tax would be dedicated to property tax relief."

For my own two cents, I think that the property tax relief is very inefficient insofar as there are huge administrative costs where the taxpayers pay a tax, only to have it rebated and redistributed.   A "Millionaires tax" on income to provide property tax relief would seem to be equally inefficient, again because of the administrative costs of taking tax from one place just to put it somewhere else. Just have the people who are subject to the "relief" pay less property tax in the first place, and all those resources that go to collecting a tax just to turn around and rebate or refund it could be allocated to something else. Also, it would be nice if both Trenton and Washington would bear in mind that a tax rebate is akin to a profit distribution by a private company, and that you need to be taking in more than you are spending before you can declare a profit.


Top Elder Law Decisions of 2010

2010Courtesy of ElderLawAnswers.com, below is a roundup of the most influential elder law court decisions of 2010, together with my thoughts as to how those cases might carry into New Jersey. The Medicaid Annuity is still generating decisions across the county, as well as questions as to when a penalty period created by a transfer begins to run.

1. Nursing Home Resident May Not Transfer Assets Beyond the CSRA to Spouse
A U.S. district court holds that under Medicaid law an institutionalized spouse may not transfer assets beyond the CSRA to a community spouse after the Medicaid recipient's eligibility has been determined. Burkholder v. Lumpkin (U.S. Dist. Ct., N.D. Ohio, No. 3:09CV01878, Feb. 9, 2010). To read the full story, click here.

(DWL – this is an unusual factual situation with a Medicaid recipient received inheritance after they were already nursing home and receiving benefits. Essentially, this maintains that the Community Spouse can only keep one half of the couple's assets up to a maximum of approximately hundred and $10,000, the Community Spousal Resource Allowance or “CSRA”)

2. Mass. Court Finds a Contract Transferring House Is Valid / California Court Finds that it is Not
A Massachusetts appeals court finds that a contract in which parents transferred property to their daughter so that they might avoid a Medicaid lien does not fail for lack of consideration because the daughter's promise to sell the property after her parents' death and distribute the proceeds to her sisters constituted valid consideration. Cascio v. D'Arcangelo (Mass. Ct. App., No. 09-P-1039, March 30, 2010). To read the full story, click here.

The Cascio summary is paired with a similar, and also much-read, case from California, Lizaso v. Lizaso.

(DWL – in the Lizaso case the court found the opposite, namely that a contract entered into solely for the purposes of obtaining Medicaid is void.)

3. Medicaid Recipient's Life Estate Is Part of Probate Estate
An Iowa court of appeals finds that a Medicaid recipient's life estate in her house is part of her probate estate for the purposes of satisfying debt, so the house does not pass directly to the remainderman. Escher v. Estate of Escher (Iowa Ct. App., No. 09-1198, April 8, 2010). To read the full story, click here.

(DWL - Here again, this case presents rather unusual factual circumstances in that the remainder person purchased life estate interest; normally, we do have a situation where a person makes a gift of the remainder interest while retaining a life estate. The point here was that the purchaser still needed to pay the agreed upon price for the life estate, which the purchaser has stopped paying upon the Medicaid recipients death)

4. Medicaid Applicant's Penalty Period Begins When Applicant Is Eligible for Medicaid
A federal district court determines that when imposing a penalty on a Medicaid applicant who made uncompensated transfers within the look-back period, the penalty period should begin to run when the applicant was otherwise eligible for Medicaid, not when the applicant is actually receiving benefits. Frugard v. Velez (U.S. Dist. Ct., D. N.J., No. 08-5119 (GEB), April 8, 2010). To read the full story, click here.

(DWL – This is a New Jersey case, and falls squarely within a plain language reading of the Deficit Production Act in that the penalty period begins to run at the later of (1) the date of the uncompensated transfer, or (2) when the applicant would have begun to receive Medicaid benefits if not for the transfer penalty).

5. Penalty Period Does Not Start Until Applicant Has Spent Down Returned Funds
A U.S. district court finds that the penalty period for a New Jersey Medicaid applicant who transferred assets and then had some of the transfers returned does not start running until the applicant has spent down the funds from the returned transfers to below the resource limit. Marino v. Velez (U.S. Dist. Ct., Dist. N.J., No. 10-911 (JAP), May 4, 2010). To read the full story, click here.
(A U.S. appeals court has subsequently affirmed this ruling.)

(DWL - this is another New Jersey case. This is similar to the other case New Jersey case in that it deals with when does the penalty period begins to run when there's been a transfer. Here, some of the money transferred was returned. The court found that plaintiff did not "become otherwise eligible for Medicaid" until she'd spent down the money that was returned her.)

6. Son Is Responsible for Medicaid Overpayment to His Father
A Pennsylvania trial court rules that the state may seek repayment of a Medicaid overpayment from the son of a Medicaid recipient rather than from the Medicaid recipient's estate. Maloy v. Dept. of Public Welfare (Pa. Commw. Ct., No. 1575 C.D. 2009, June 10, 2010). To read the full story, click here.

(DWL - Here, the Medicaid recipient’s son was his Guardian, and after the Medicaid recipient began to receive Medicaid, the son transferred some of Medicaid recipient’s assets to himself. The court found that Pennsylvania could pursue the son not only because it was legally allowed, but it was equitable in that son was the one who made the transfers to himself in the first place, thus making the father no longer eligible for Medicaid).

7. Payments Under Personal Service Agreement Are Compensated Transfers
A New York appeals court "annuls" a Medicaid determination that a nursing home resident's payments to his son pursuant to a personal services agreement were uncompensated transfers. In the Matter of Warren Kerner v. Monroe County Dept. of Human Services (N.Y. App., 4th Dept., No. TP 10-00197, July 2, 2010). To read the full story, click here.

(DWL - this upholds that a personal care contract, if properly drafted and reasonable, provides value to the recipient Medicare in terms of services, and as such is not an uncompensated transfer for Medicaid purposes, which would otherwise create a penalty period.)

8. Assets in Trust Created by Husband Are Available for Purposes of Determining Wife's Medicaid Eligibility
A Massachusetts appeals court holds that a trust created by the husband of a Medicaid applicant independently of his will is a Medicaid qualifying trust even though the bulk of the assets in the trust passed through the husband's will. Victor v. Mass. Executive Office of Health & Human Services (Mass. Ct. App., No. 09-P-1361, July 21, 2010) (unpublished). To read the full story, click here.

(DWL - this case turns on Massachusetts state law as to what is a Medicaid Qualifying Trust and what is not. In New Jersey, generally speaking, a discretionary trust created by a third party, with that third parties own assets for person’s benefit is not a countable asset for Medicaid qualification purposes.)

9. Income Stream from Annuity Is Not Asset for Medicaid Eligibility Purposes
In a case pursued by the ElderLawAnswers member firm of CzepigaDalyDillman, a U.S. district court holds that Connecticut cannot treat the income stream from an annuity as an available asset for the purposes of Medicaid eligibility. Lopes v. Starkowski (U.S. Dist. Ct., Dist. Conn., No. 3:10-CV-307, August 11, 2010). To read the full story, click here.

(DWL - under federal law, income and assets are separated in determining Medicaid eligibility. Here, Connecticut tried to argue that the income stream from annuity was an asset, not income. The court held that the income stream is just that, income."

10. Annuity Purchased Post-Eligibility Determination Is Available Resource
A federal district court rules that an annuity purchased by a Medicaid applicant's husband post-eligibility determination is an available resource. Morris v. Oklahoma Department of Human Services (U.S. Dist. Ct., W.D. Okla., No. CIV-09-1357-C, Sept. 24, 2010). To read the full story, click here.

(DWL - Here, a husband was determined Medicaid ineligible. In order to create eligibility, the wife purchased an annuity, thus transforming what had been his asset into an income stream for herself. The Oklahoma court found that the now annuity should still be treated as an asset, because to do otherwise would make the law required the spend down of assets totally superfluous. The purchase of the annuity would have been a successful transfer had it been done prior to the state determining Medicaid eligibility for the husband.)

Image: Idea go / FreeDigitalPhotos.net

NJ is #1! On "The Worst Places to Die" List

First PlaceSmartMoney just published "Estate Taxes: The Worst Places to Die" and New Jersey takes the number one spot.

16 states and Washington DC have an estate tax seperate from the federal estate tax (which has a current exemption amount of $5 million per person for deaths in 2011-2012).  The article specifies that these exemptions range from $338,333 for Ohio residents to $5 million for Hawaii and North Carolina residents:

* Three states have exemptions of less than $1 million (Ohio at $338,333; New Jersey at $675,000;
and Rhode Island at $850,000).
* Six states have $1 million exemptions (Maine, Maryland, Massachusetts, Minnesota, New York, and
Oregon), and so does D.C.
* Three states have $2 million exemptions (Illinois, Vermont, and Washington)
* Two states have $3.5 million exemptions (Connecticut and Delaware).
* Two states have $5 million exemptions (Hawaii and North Carolina).

The lowest tax rates are 7% (Ohio) and 12% (Connecticut). The highest is 19% (Washington). The other 13 states and D.C. all charge 16%.

6 states have an Inheritance Tax (a tax on specific assets passing to specific people), as follows:

The inheritance tax exemptions are zero or negligible--except in Tennessee which has a $1 million exemption.

The tax rates are 9.5% in Tennessee, 15% in Iowa and Pennsylvania, 16% in Kentucky, 18% in Nebraska, and 20% in Indiana.

2 states have an Estate Tax and an Inheritance Tax - Maryland, and ... you guessed it, New Jersey.

For anyone who lives or had property in the 22 States with estate or inheritance tax, the government may share in your wealth when you die.  You should become educated about what your state's transfer tax scheme is, as well as what planning might be done to minimize its impact.

Make Large Gifts Now, Pay More Tax Later?

If you make big gifts in 2011-2012, what happens when you die in 2013 and beyond?

Right now, and continuing through 2012, there is a gift tax/estate tax/GST exemption amount of $5,000,000 per person. We have discussed before what a fantastic opportunity this can be for wealthy families to do transfers at little or no transfer tax.

However, for every action, there is also a reaction. One thing that is not being talked about, and that families need to be aware of, is: What are the consequences of making a large gift utilizing the $5,000,000 exemption amount, in the event that the estate tax exemption amount upon your death is lower (such as $1,000,000) and what impact this might have on your New Jersey estate taxes.  This problem is sometime referred to as the "Clawback" (no, I did not make that up).

All of this stems from the little known or understood fact that “prior taxable gifts” are added to a person’s taxable estate to determine their federal estate tax liability. Since New Jersey relies on the Federal estate tax liability scheme as it existed in 2001 to determine its estate taxes, the Clawback issue is particularly dear to New Jersey residents.

When making a gift using your gift tax exemption, it is generally explained that you use it now or you use it later. For example, if you make a gift of $2,000,000 during your lifetime, and the estate tax exemption amount was $5,000,000 on your death, you would effectively have $3,000,000 of your exemption left. However, the way that is calculated is you have $6,000,000, you gave away $2,000,000 (leaving a $4,000,000 estate, which is less than the $5,000,000 exemption amount) and you die. Your prior $2,000,000 gift is added back to your taxable estate of $4,000,000, creating the same $6,000,000 taxable estate, the $5,000,000 is applied to the estate, and in my example, you have $1,000,000 upon which the estate tax may be levied.

The problem? What happens if the estate tax exemption amount is less upon your death. Going back to the example above, you had a $6,000,000, you gave away $2,000,000 so that you have a $4,000,000 estate upon your death. You add back in the $2,000,000 to create a $6,000,000 taxable estate, but you only have a $1,000,000 exemption amount. In this situation, your taxes are being levied on a $5,000,000 taxable estate ($6 million less $1 million exemption), but in reality, there are only $4,000,000 of assets actually in your estate, because you had added back this theoretical $2,000,000 that you had already given away.

For New Jersey purposes, this situation can be even worse. That is because New Jersey has such a low estate tax threshold of $675,000. Theoretically, you could have had $5,100,000, and given away $5,000,000. For New Jersey estate tax purposes, the $5,000,000 "prior taxable gift" is added back in to your taxable estate, and the New Jersey estate tax is calculated on the combined amount.  The New Jersey estate tax is somewhere in the vicinity of $350,000, but the only assets that you actually have are $100,000.

So when considering gifting to take advantage of the 2011/2012 transfer tax sale, thought must be given to what happens after the sale is over – will so much of your estate be potentially subject  to taxes if there is a lower estate tax rate (or if you are in New Jersey) that making a gift now precludes you from making other distributions upon your death?

Thanks to Steven A. Loeb, Esq. for his insights for this article.

Photo © Mark Rasmussen | Dreamstime.com

Court Can't Create a Special Needs Trust Where There Wasn't a Will

HandicappWhile courts have the power to interpret a person's intent in a Will to create a Special Needs Trust for a disabled beneficiary, even when the Will does not specifically create such trust, the courts can't create a Special Need Trust out of thin air if the person didn't have a Will.  Stacey C. Maiden, Esq., of our Trusts, Estates and Elder Law Department, shares this recently crafted holding from the case of IMO Estate of Margaret A. Flood.

The New Jersey Appellate Court recently considered the unique question as to whether a court could establish a Special Needs Trust in an intestate estate. In this case, the decedent was survived by 4 children. Two of the children were disabled and beneficiaries of supplemental security income (SSI) and Medicaid programs. One of the children received special residential services and other benefits from the division of developmental disability (DDD). The decedent died without a Will, which under the New Jersey intestacy statute distributes her property equally among her four children.

The decedent did consider estate planning in 2004 and according to the certification of her daughter-in-law, she was concerned about protecting the inheritance of her disabled daughters from any obligations to reimburse the governmental entities that provided benefits and services. The decedent did not consult an attorney until March and April of 2008, and she died on May 24, 2008 having never executed a Will or a testamentary trust.

The lower court permitted the establishment and funding of supplemental benefit trusts for the decedents two disable daughters by applying to doctrine at probable intent. The Appellate Court reversed stating that in the absence of a testamentary disposition, the decedent’s estate passed by way of the law of intestesty, and her children’s interests vested immediately upon her death (N. J.S.A. 3B:1-3.)

The Appellate Court stated that the doctrine of probable intent has no application in the absence of a Will. The Court found that the doctrine of probable intent has never been applied to create a testamentary disposition when the decedent failed to execute a Will. “In essence the doctrine of probable of intent is rule of construction or interpretation and therefore, presupposes an existing testamentary disposition.” The court concluded that the existing case law precludes application of the doctrine of probable intent to create a testamentary disposition where none existed.

The moral here? You need to be responsible for how your assets are passing to disables beneficiaries in the event of your death by creating a Will that take their disability into account.  For further information, see an in-depth analysis of the case by my colleague told in a rally in his posting Doctrine of Probable Intent Cannot Be Used to Create Special Needs Trusts for Intestate Decedent.

Should the Rich and Wealthy get something for paying all those taxes? (Humor)

Dividing Dollars I came across Top 10 'Bad Ideas' for Taxing the Rich and couldn't help but share it.

The premise, how to encourage the rich to pay more in taxes, in a tongue in cheek fashion.  Author Robert Frank summarized some of the "best" suggestions:

1–Naming Rights. Depending on your tax bill, you get naming rights for federal property such as highways, bridges, etc.

2–Frequent Flier Points. One reader wrote: “High income taxpayers would accumulate points based on their tax percentile, which could then be redeemed for the ultimate status symbols: merchandise frankly (yet discreetly) proclaiming the bearer’s high income bracket. Imagine, for example, a metallic Coach tote with a sterling ‘1%’ charm on the zipper, proclaiming that the woman carrying it is in the top 1% of US taxpayers. And what businessperson wouldn’t want the Montblanc half percent pen, with a simple ‘.5%’ engraved in the snowy tip of the pen? Those in the know would recognize and respect these symbols of achievement.”

3–A Parade. On April 15, rich people who paid more than $500,000 in taxes could march down Constitution Avenue and shake hands with the President and members of Congress at the end.

4–Tax the Foreign Rich. We should provide “expedited citizenship” to immigrants who will buy a home for a value of at least $300K-$400K. This will reduce our excess housing stock, bring capital into the country and probably bring in productive taxpayers.

5–Access Passes. The rich would get preferred access to public parks/national museums.

6–Exemption from jury duty.

7–The “Fat Tax.” Impose tax incentives tied to a person’s overall Body Mass Index (BMI), as well as a % change in BMI versus the prior tax year.

8–A telethon. A 24-hour live TV auction offering one-on-one experiences with 1,000 “A-List” Stars of entertainment, sports, business and politics with 100% of proceeds earmarked to help fund a specific U.S. Government program. Experiences might include lunch with the President, a concert with Lady Gaga and helicopter skiing with Will Smith. All proceeds would go to taxes and the stars would revel in the patriotism of helping the government.

9–Rent out paintings and other artifacts from the Smithsonian. “The Smithsonian provides 1,000 treasures that are each available for one-year (or more) rentals at $50+ million (plus shipping) annually to the highest (sealed) bidder,” one reader suggested.

10–Shame. Anyone who agrees to pay a higher tax rate will be exempt from having their names published in the local newspaper. Rich people, after all, hate adverse publicity.

I personally like 2, 4, 6 and 9 :)

Photo:  © Alexandr Denisenko | Dreamstime.com


The Wealthy and Wise - A New Community Coming Soon for You

AnnouncementI am so excited to share that a new go-to website, The Wealthy and Wise, is in its countdown to launch phase.  You can get a preview (without all the bells and whistles that are in the works) at www.thewealthyandwise.com.  

What is The Wealthy and Wise all about?  It's an information resource created to fill a void in giving middle class millionaires, and those looking to join them, the tools they need to understand how to protect and build wealth.  Laura Mattia of the Baron Financial Group is joining me in hosting The Wealthy and Wise.  This Community targets families who have been successful in working hard and are at the point of looking around at what they have built and asking "OK, what should I be doing next?"  

In the new The Wealthy and Wise Community, you will find:

  • Webisodes of The Wealthy and Wise TV - our monthly video series on topics you need to educate yourself about in order to know how to protect and build your wealth. Free subscriptions will be available through iTunes.
  • Podcasts of Case-Studies and Current Events – our audio series of specific case-studies about questions we see in our practice and solutions we have offered that may parallel your current life situation. Here, we will also address current events relevant to protecting and building wealth. There will be free subscriptions to the podcasts available through iTunes.
  • Video Spotlights - short, in-depth videos addressing a specific areas of current events, tax, law and finance for your reference and information.  You can see an example in my prior post about Gift, Estate and Generation Skipping Taxes being on sale in 2011 and 2012.
  • The Wealthy and Wise Guides - e-books providing in-depth coverage of key topics to implement the right strategies to reach your goals. Guides will be available for purchase at Amazon.com.

Can I ask for your help? We want to build our shows and this site around the information you want to have.  What topics do want clarity about?  What are the questions about you wealth that you haven't found full information for, or felt that maybe the person answering them didn't go into enough depth.  Please leave a comment or email me.

We look forward to bringing some new information to you at www.thewealthyandwise.com.