Many individuals and even lawyers are under the impression that distributions of an estate are subject to income tax. This is a misconception.
Under the fiduciary income tax rules, there is a concept similar to estate income which is called d.n.i. or distributable net income. For example, if an estate has $100,000 and $6,000 of income, and assuming there are three beneficiaries, distributions of the entire estate would only be income to the beneficiaries to the extent of d.n.i.. Suppose that the distribution of $100,000 resulted in d.n.i. of $6,000, the distributions would result in taxable income of $2,000 to each beneficiary.
If the estate does not end within one year, capital gains are also distributed to the estate. Since the estate reaches maximum income at a much lower rate than an individual, accumulation of
estate income only results in a reduction of principal. Therefore, income from an estate should be distributed mandatorily.
Any distributions of income are deductions to the estate. That is, d.n.i. not only is a measuring rod of taxable income, but also determines the distributions to the estate.
If the estate terminates within one year, capital gains pass through as d.n.i.. However, if there are capital gains and the estate is not distributed within one year, the capital gains are distributed to the estate.
Income tax to the distributees can be deferred by the estate electing a fiscal year. That is, income is taxable to the beneficiary in the taxable year of the beneficiary.
Not all items are subject to estate income tax. For example, life insurance is received by the beneficiary tax-free. However, certain items of life insurance are taxable, such as pre-paid premiums and post-mortem dividends.
The computation of d.n.i. is more complicated than the scope of this article, but it does approximate estate income. The form for preparing estate income is a 1041 and the amount of estate income taxable to the beneficiary is reflected on a Form K-1.
Also, the character of the income to the estate carries through to the beneficiary. For example, if one half of the estate income is dividends and one half is bank income, the distributions carry through, pro rata.
As stressed in many of my articles, it is necessary to retain other professionals in handling an estate. Therefore, an accountant should be retained to prepare estate income tax returns.
With respect to the income taxation of trusts, the rules are similar and the form is the same.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 182
Monday, January 30, 2012
Monday, January 23, 2012
Competent Person with Option to Reside in Two States
Very often the elder law attorney will be faced with a situation in which an individual who is competent and needs nursing home care resides in a state other than New Jersey. The family is considering whether the individual should go into a nursing home in the other state or should go into a nursing home in New Jersey.
Although the cardinal rule is that the decision should be made with respect to what is best for the parent, such decision may be made with reference to the law in both states.
It is my opinion that an attorney should not practice elder law in two jurisdictions as the law changes day to day in almost every jurisdiction. Therefore, I would recommend that the competent parent be on a conference call between the attorneys from two jurisdictions.
The attorneys from each jurisdiction should advise as to how Medicaid works in each of the jurisdictions and let the family decide which jurisdiction is appropriate.
An attorney rendering such advice who is licensed in only one jurisdiction, could be acting criminally for giving advice in the other jurisdiction. Also keep in mind, that if the person is incompetent, a change in jurisdiction would be impossible as the individual could not form domiciliary intent.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 181
Although the cardinal rule is that the decision should be made with respect to what is best for the parent, such decision may be made with reference to the law in both states.
It is my opinion that an attorney should not practice elder law in two jurisdictions as the law changes day to day in almost every jurisdiction. Therefore, I would recommend that the competent parent be on a conference call between the attorneys from two jurisdictions.
The attorneys from each jurisdiction should advise as to how Medicaid works in each of the jurisdictions and let the family decide which jurisdiction is appropriate.
An attorney rendering such advice who is licensed in only one jurisdiction, could be acting criminally for giving advice in the other jurisdiction. Also keep in mind, that if the person is incompetent, a change in jurisdiction would be impossible as the individual could not form domiciliary intent.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 181
Tuesday, January 17, 2012
Attributes of an Elder Law Attorney
The elder law attorney must be familiar with various areas of law. These areas include elder law, tax law, constitutional law and estate law. The following are merely some examples. In a prior ICLE seminar, Janice Chapin, Esq. pointed out that the Medicaid statute should not be reviewed from the tax point of view but should be reviewed from the benefits point of view. The following are an example of this and other examples:
1. In the Mishkin case, the court held that the IRA of a community spouse was a resource. Technically, since Medicaid incorporates the social security statutes by reference and such IRA is not a resource for social security purposes, this decision is technically incorrect.
2. The elder law attorney must be familiar with the constitution. In one of my prior seminars, entitled: Constitutional Aspects of Elder Law, I stress such constitutional issues and in particular the doctrine of federal pre-emption.
3. The elder law attorney must be familiar with estates and trusts. For example, an estate in probate is an inaccessible resource. The question becomes when a community spouse inherits, whether the property in probate becomes a resource.
4. The elder law attorney must be able to rely on other professionals and determine what the appropriate time is. In Blog 165, I pointed out the need for other professionals and the appropriate time.
5. The approach of the elder law attorney is pointed out in Blog 167. That is, the elder law attorney should not dictate to the client what to do, but should point out the various possibilities and let the client decide.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 180
1. In the Mishkin case, the court held that the IRA of a community spouse was a resource. Technically, since Medicaid incorporates the social security statutes by reference and such IRA is not a resource for social security purposes, this decision is technically incorrect.
2. The elder law attorney must be familiar with the constitution. In one of my prior seminars, entitled: Constitutional Aspects of Elder Law, I stress such constitutional issues and in particular the doctrine of federal pre-emption.
3. The elder law attorney must be familiar with estates and trusts. For example, an estate in probate is an inaccessible resource. The question becomes when a community spouse inherits, whether the property in probate becomes a resource.
4. The elder law attorney must be able to rely on other professionals and determine what the appropriate time is. In Blog 165, I pointed out the need for other professionals and the appropriate time.
5. The approach of the elder law attorney is pointed out in Blog 167. That is, the elder law attorney should not dictate to the client what to do, but should point out the various possibilities and let the client decide.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 180
Monday, January 9, 2012
Resource and Lien Regulations Not Drafted with Reference to Each Other
In our Legislation course at law school, we learned the doctrine of in pari materia. This means that statutes are drafted with reference to each other.
Unfortunately, this is not the case with respect to the resource rules and the lien regulations.
For example, in Blog 60, I pointed out that the state treats a disinheritance as a transfer to the extent of the elective share. The spouse's beneficial interest in any life estate or trust shall be valued at one-half the total of the property of the trust. Therefore, it would appear that a testamentary trust provided solely income to the spouse in the nursing home would prevent disinheritance from being treated as a transfer. That is, a trust with twice the income of the community spouse devised to the spouse in the nursing home satisfies the elective share requirements. However, lien regulations under N.J.A.C. 1:49-14.1(n)3. provides that if a trust is a discretionary trust, the Medicaid beneficiary cannot compel distributions and if the Medicaid recipient had no interest for 5 years, the trust is not subject to the lien. However, such testamentary trust would be treated as a disinheritance and not satisfy the elective share.
Therefore, I have concluded in my materials on an ICLE program entitled: "Estate Planning Issues" Final Medicaid Regulations (Finally!), that the best approach to avoid such problems would be to devise the elective share to the nursing home recipient.
The discrepancy between the lien regulations and the transfer regulations seems ridiculous. That is, if you provide for a discretionary trust for a nursing home resident, that would be treated as a resource notwithstanding the fact that such trust would not be subject to the lien regulations. Query: how could one draft a trust that would not satisfy the lien regulations, if one did not qualify for Medicaid since such devise would be a transfer under the elective share provisions which would require mandatory income.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 179
Unfortunately, this is not the case with respect to the resource rules and the lien regulations.
For example, in Blog 60, I pointed out that the state treats a disinheritance as a transfer to the extent of the elective share. The spouse's beneficial interest in any life estate or trust shall be valued at one-half the total of the property of the trust. Therefore, it would appear that a testamentary trust provided solely income to the spouse in the nursing home would prevent disinheritance from being treated as a transfer. That is, a trust with twice the income of the community spouse devised to the spouse in the nursing home satisfies the elective share requirements. However, lien regulations under N.J.A.C. 1:49-14.1(n)3. provides that if a trust is a discretionary trust, the Medicaid beneficiary cannot compel distributions and if the Medicaid recipient had no interest for 5 years, the trust is not subject to the lien. However, such testamentary trust would be treated as a disinheritance and not satisfy the elective share.
Therefore, I have concluded in my materials on an ICLE program entitled: "Estate Planning Issues" Final Medicaid Regulations (Finally!), that the best approach to avoid such problems would be to devise the elective share to the nursing home recipient.
The discrepancy between the lien regulations and the transfer regulations seems ridiculous. That is, if you provide for a discretionary trust for a nursing home resident, that would be treated as a resource notwithstanding the fact that such trust would not be subject to the lien regulations. Query: how could one draft a trust that would not satisfy the lien regulations, if one did not qualify for Medicaid since such devise would be a transfer under the elective share provisions which would require mandatory income.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 179
Tuesday, January 3, 2012
Real Estate Spending as Part of the Spenddown
In numerous blogs, I have pointed out that real estate expenses are part of the spenddown to Medicaid.
However, sometimes such expenses may raise questions.
For example, in a recent blog (entitled: "Step-Transaction Doctrine"), an interesting issue arises.
Suppose a parent is going to transfer the house to a child because the child provided the necessary care to allow the parent to remain home. We are aware that such transfers are exempt.
The question then becomes can expenses be incurred by the parent before the transfer as part of the spenddown or would Medicaid apply the step-transaction doctrine and say such expenses were for the benefit of the child.
I have spoken to several supervisors and they have taken the position that so long as the expenses were paid while the potential applicant is residing in the home they will not be treated as transfers and be part of the spenddown. I was surprised by such result, but it just points out that you have to inquire even if you are in doubt regarding Medicaid issues.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 178
However, sometimes such expenses may raise questions.
For example, in a recent blog (entitled: "Step-Transaction Doctrine"), an interesting issue arises.
Suppose a parent is going to transfer the house to a child because the child provided the necessary care to allow the parent to remain home. We are aware that such transfers are exempt.
The question then becomes can expenses be incurred by the parent before the transfer as part of the spenddown or would Medicaid apply the step-transaction doctrine and say such expenses were for the benefit of the child.
I have spoken to several supervisors and they have taken the position that so long as the expenses were paid while the potential applicant is residing in the home they will not be treated as transfers and be part of the spenddown. I was surprised by such result, but it just points out that you have to inquire even if you are in doubt regarding Medicaid issues.
Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.
© January 2012, Post 178
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