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We Don’t Owe Estate Tax So What the Heck is Inheritance Tax?
June 28, 2010
I got a call from Joe last week. His brother Jim died 5 months ago. Jim had never married and had no children, leaving his estate of assets totaling $150,000 to Joe. Everything seemed so simple. There was no need to pay taxes, or so he thought, because there is no federal estate tax this year and New Jersey estate tax is only owed on estates greater than $675,000. So why was Joe’s friend telling him he may have to pay taxes?
What Joe was talking about is inheritance tax. Only a handful of states have it and New Jersey is one of them. Inheritance tax works differently than estate tax, which is based on the size of the estate. Inheritance tax, on the other hand, is based on the relationship of the heirs to the decedent (person who died). Parents, grandparents, children, grandchildren, spouses and domestic partners are exempt from the tax. So are stepchildren, but not stepgrandchildren. Siblings, sons in-law and daughters in-law pay tax at one rate and other more distant relatives and non-relatives pay tax at another rate.
Inheritance tax is due 8 months after death, one month before the estate tax is due. In cases where both estate and inheritance tax are due, the total combined tax is not greater than the larger of the 2 taxes. In essence, if inheritance tax is due then that payment acts as a credit towards the estate tax.
Joe, like most people, was unaware of inheritance tax. It is typically owed on estates where there are no spouses or children. In his case, the tax totals about $13,000 and if not paid, carries 10% per year interest rate. There are other quirks in terms of what is taxed and what isn’t. For example, life insurance isn’t subject to the tax if you’ve left it to named beneficiaries. However, if those people all have died, for example, and the insurance is left to the estate, then it is taxed. However, the life insurance is subject to estate tax . It is easy to get tripped up by which assets are taxed for inheritance, and which for estate tax purposes.
The point is that each estate has to be looked at individually. Just because your friend or neighbor didn’t have to pay inheritance tax doesn’t mean you don’t have to. I explained to Joe that we still have time to complete the return and pay the tax on time. The last thing he wants is the state coming after him for unpaid tax.
Should I Leave My Disabled Child’s Inheritance to a Sibling to Hold?
June 21, 2010
For a variety of reasons parents often wish to distribute their estates equally amongst their children but not necessarily to each child outright. That may be because the child has a disability, substance abuse problem, issues managing money or other financial problems. Many people attempt to solve this problem by leaving that child’s share to a sibling to “hold and manage” for his brother/sister. Jack’s tale is a cautionary one against the dangers of employing what would seem to be an “easy” solution.
Jack’s dad had recently died leaving his estate to Jack and his 2 sisters in equal shares. But Dad’s will actually left Jack 2/3 of the assets because Jack’s sister Mary has special needs. She is not capable of managing her money and would lose her government benefits if she received her inheritance outright. Jack, however, was just diagnosed with Alzheimer’s Disease and may need nursing home care within the next few years. He understands that he will have to pay for that care but he doesn’t want to use Mary’s money for his care. There’s one big problem. It isn’t legally Mary’s money.
You see, Dad specifically disinherited Mary in his will. It makes no mention of his intent to have Jack take care of his sister. It just says that Jack inherits 2/3 of the estate. Legally, it’s his money so if he needs long term care he’ll have to spend down his money and Mary’s, before he can qualify for government assistance.
What Dad should have done was set up a special needs trust in his will and left Mary’s share to that trust. He could then have named Jack as the trustee and his sister Helen as a back up trustee. Mary would not lose her benefits. Jack would not have to spend down that money for his care. In fact, he can’t, since the money is not his. And if he can no longer serve as trustee then Helen can step up.
Could Jack set up a trust now? The answer is yes, but because Medicaid rules are quite complicated, the assets transferred to that trust would still subject him to a Medicaid transfer penalty. If Mary was his daughter and not his sister then he could avoid the penalty. In other words, Dad could have done it for Mary because of the parent/child relationship.
What Jack’s problem shows us is that sometimes the “easy” solution creates problems that are far more complicated to solve than the original problem. While it’s possible that Jack may still be able to protect Mary’s inheritance it is far from certain, and much will depend upon how long he stays healthy.
If I Apply for VA Benefits Can I Still Get Medicaid?
June 14, 2010
I am always explaining how the various sources of payment for long term care don’t mesh well together. That is certainly true when it comes to VA Aid and Attendance and Medicaid benefits. There are quite a few misconceptions. One is the idea that by receiving VA benefits in an assisted living facility a resident will later be ineligible for Medicaid assisted living benefits.
That statement is incorrect and leads to many veterans foregoing as much as $1949 of tax free income each month that can help pay for assisted living care. But it is easy to understand why so many make this mistake. It’s because the Medicaid waiver programs that pay for this type of care have an income cap of $2022 per month. So naturally, the concern is that the additional VA income will push me over that income cap.
Except that not all income is treated as income for Medicaid purposes. The VA Aid and Attendance benefit falls into that category. It does not constitute “countable income”. In fact, there is a Medicaid Communication issued by the New Jersey state agency that administers Medicaid, clearly stating that the benefit will not be counted for financial eligibility purposes. I should also note that Medicaid won’t deny an application if someone does not apply for VA benefits. That can also be a point of confusion since Medicaid does require applicants to apply for other benefits that they may be eligible for, such as disability.
Another point of confusion is that while the VA benefit is not counted for eligibility purposes, it is included with all other income when determining the amount of contribution towards the cost of care. This is the cost sharing aspect to Medicaid assisted living benefits. How much you pay for your own care and how much Medicaid pays depends on your income. However, once VA receives notification of Medicaid benefits received it will reduce its pension to $90 per month.
As you can see, it’s tough navigating through the long term care system alone. It can cost you literally thousand of dollars a year if you don’t get the right information.
If We Apply for Nursing Home Medicaid are We Giving Up?
June 7, 2010
When working with families struggling with the sudden realization that long term nursing care is necessary for a loved one, two issues so often cause internal conflict. One is the fear that, at $10,000 a month or more, “we’re going to run out of money”. The other is the desire to do everything possible to bring my loved one home. In other words, by applying for nursing home Medicaid does that mean we’re giving up on going home?
The answer is “absolutely not”. As the cost of long term care increases and the population continues to age, two things become increasingly clear. It is usually less expensive to receive long term care at home and most people prefer to receive their care at home. Yet, when 24/7 care is necessary and you’ve run out of money, getting Medicaid to cover care at home has always been much harder than in a nursing home. But that is starting to change.
In New Jersey we have several community waiver programs. That’s what Medicaid calls programs that pay for long term care outside of a nursing home, in the community. It could be in a person’s own home or in an assisted living facility. In 2006 then Governor Corzine signed a bill to enable Medicaid nursing home residents to return to the community provided they are medically able to do so. In 2009 what came to be known as the Global Options program was expanded to include several waiver programs.
So, what does this mean in plain English? That if my spouse is in a nursing home on Medicaid he or she doesn’t have to stay there. We must contact the nursing home social worker who will then assemble a team of nursing home staff and the resident’s family who will discuss whether and how that can be done while preserving the health and safety of the resident.
The financial eligibility requirements for Global Options are similar to those for institutional (nursing home) Medicaid although there is no option of coverage for those whose income exceeds the $2022 per month income cap. However, Global Options can be a great option for many families struggling with the need for nursing home care now but who don’t want to give up on the possibility of bringing their loved one home at some point down the road.
How We Can Help Our Veterans
May 31, 2010
As we take the day to honor our Veterans, both young and old, it is a good time to take note of how many veterans are in need of assistance. It has been a while since I have featured veteran’s benefits on this blog. Today is a perfect day to remind veterans and their families that help is available.
There are a number of different VA programs, many which are not publicized. This results in many veterans and their families losing out on benefits for which they are eligible. The Aid and Attendance program is one such program. Eligible wartime veterans can receive as much as $1954 per month of tax free income.
There are income and asset limits to qualify. Single applicants can have no more than about $40,000 in assets and married applicants under about $80,000 (primary residence is exempt). The income limits are too complicated to explain in a short post such as this, but before you jump to the conclusion that you do not qualify it is best to consult with a knowledgeable elder law attorney because so often restructuring your assets can result in immediate qualification. For more information I suggest you sign up for my free e-course on VA benefits www.learnvabenefits.com/hauptman.
So, on this Memorial Day, as you salute a veteran you can also do so much more by alerting your veteran loved one that help may be available.
