New Jersey Long-Term Care & Estate Planning Overview
Americans are living longer and traditional notions of "estate planning" are no longer sufficient to pass assets to younger generations. People, who married and raised a family, frequently worked 40 to 45 years. They saved, bought a home and "socked money away" for retirement. They may be fortunate to have a pension and more likely than not they received Social Security once they retired.
Historically, as parents and grandparents aged their families took care of them. Family members lived near one another and generally only the husband worked while the wife stayed home to raise the family. Thus, "mother" was home and could, when necessary, care for the elderly. And, she probably had family members around the corner to help. As people became more mobile and children no longer lived nearby, parents and grandparents could no longer depend on family to help when they could no longer live alone in their own homes.
The fact is that the elderly now are, more often than not, cared for in long-term care facilities, either assisted living facilities or nursing homes. They frequently outlive their assets so what they worked a lifetime to acquire is lost in the last few years of their lives. They die paupers with nothing to show for a lifetime of effort.
For this reason the elderly need to consider passing/gifting assets while alive, before everything is lost, if they want their families to receive a part of what they worked a lifetime to obtain. We call this concept "long-term care planning" and that planning requires the same attention to detail, if not more, as traditional estate planning.
What is long-term care planning?
Long-term care planning entails developing a transfer/gifting program which is designed to move assets from the elder to his/her children or grandchildren without violating the rules and regulations relating to the Medicaid program. A long-term care plan must be carefully created and, depending on the facts and circumstances involved, consider the needs of the elder and, if married, his/her spouse. The plan needs to provide for all involved and is not created in a vacuum. The ultimate goal is to provide for the healthy spouse, also known as the community spouse, if there is one, and pass as much as possible to the family. This requires a careful balancing of everyone's interests. Once the appropriate goals are determined we draft the documents needed to implement the plan. Depending on the needs and financial situation of the individual, documents and/or devices such as trusts, annuities, joint ownership of property and accounts, may be employed in addition to gifting.
Long-term care planning is not, however, done without also drafting appropriate estate planning documents. Long-term care planning and estate planning go hand-in-hand.
Estate planning involves at least three documents: a will, a power of attorney and an advanced directive with a health care proxy (aka living will). Other documents such as living trusts may also be employed. The planning process is goal oriented, that is, it is designed to meet the specific needs of the individual.
Long-term care plans and estate plans are unique to each person. While it may seem to be "simple" in concept, each is its own creation. Each is the product of the individual, in conjunction with the guidance and work of the attorney, and designed to meet the special needs and concerns of that particular person.
Three elements of estate plans
The following information relates to the three basic documents that form the core of most estate plans:
A will is a document prepared by an individual, called the testator, which states how the person wants his/her possessions distributed following death. This document only controls distribution of estate (probate) assets. An estate asset is something owned exclusively (that means it is not in joint names with anyone else) by the testator and that passes through the estate to beneficiaries designated in the will. Assets that do not pass through the estate are non-estate (non-probate) assets. Ownership of non-estate assets pass to the beneficiaries as a result of the document or contract which creates the asset or ownership of the asset. Examples of non-estate assets are life insurance policies, bank accounts owned jointly with another person and IRAs with a named beneficiary other than the individual's estate. With non-estate assets the documents of ownership contain clauses which designate beneficiaries or joint owners and thus result in distribution outside the will.
Bear in mind that although property may be non-probate property it may still be subject to inheritance and/or estate taxes (commonly referred to as "death taxes"). Therefore, careful consideration must be given to the overall structure of the individual's estate. Depending on the total assets involved, tax planning, as part of the overall estate plan, may be appropriate to minimize, and possibly eliminate, death taxes.
Another important planning consideration is the need to provide for minors and disabled or incapacitated family members. In these situations consideration must be given to providing for the family member while, at the same time, protecting any benefits he/she may already be receiving. Frequently a trust will be used for this purpose. Also, in these situations a guardian should be selected. These are items/issues that should be considered and incorporated into an individual's will. If the testator does not deal with these issues, a judge will and his decision may not be the one the testator would have chosen.
When preparing a will the individual wants to consider to whom he/she wants to give his/her possessions. These individuals are the beneficiaries. Usually, but not always, beneficiaries are the spouse and/or children of the testator. Beneficiaries could also be grandchildren, friends, other family members or charities. Gifts can be given directly to the individuals or indirectly through a trust.
A trust is a planning device which owns assets for the benefit of someone called the "trust beneficiary." The trust is administered by a trustee in keeping with the directions of the person, referred to as the "grantor," that established the trust. A trust can be created in a will (a testamentary trust) or during an individual's life-time (a living trust). A living trust can receive gifts through an individual's estate via the will or from transfers made during the life of the grantor.
The testator designates an executor for his/her will. An executor is the person who administers the will by following the provisions of the document. The executor takes possession of the estate assets, pays the final bills and death taxes (if any), and distributes the remaining assets in keeping with the document's directions.
Thus, when preparing a will the testator needs to (1) identify his/her estate assets; (2) determine his/her beneficiaries; (3) decide what assets or how much to give each beneficiary; (4) determine what assets pass outside the will as non-estate assets; (5) plan distribution of the assets taking into consideration estate (probate) and non-estate (non-probate) assets; (6) decide if a trust is necessary and, if so, who the trustee(s) will be and the terms and conditions of the trust; (7) decide on a guardian for minor children and (8) decide who will be designated executor.
Power of Attorney
A power of attorney is a document prepared by an individual (the principal) which authorizes a designated person to transact business on behalf of the principal. The person to whom the power is given is called the "attorney-in-fact." The power given can enable the attorney-in-fact to do everything relating to finances the principal could do for himself/herself (except execute a will) or can be limited to certain designated actions. For example, the power of attorney document can give a power to sell a parcel of real estate or the power to write checks. It could give the power to operate the principal's business; and could permit the attorney-in-fact to give gifts and/or engage in Medicaid planning, which is a form of "long-term care planning."
A power of attorney can take effect when signed or sometime in the future if the principal becomes disabled. The power can and most often should be durable, which means it continues in effect even though the principal may become disabled. A power designed to take effect only in the event the grantor becomes disabled is called a "springing power." With a springing power the grantor must provide a workable definition of disability so there is no misunderstanding regarding when the power becomes operative. Additionally, when dealing with a springing power the mechanics of how it will spring to life should be carefully defined.
A power of attorney is a valuable and important planning device. It enables the principal to decide who will handle his/her financial affairs and how those affairs will be managed. Putting a child on a bank account, as so many individuals do, is not a substitute for preparing a power of attorney. The child will not be authorized to transact business for the individual or conduct his/her affairs as a result of which it would likely be necessary to have a guardian appointed by a court to handle the individual's affairs, other than the specific account, if the principal should become incapacitated in the future. This can be avoided by executing a power of attorney.
It is important to understand that, although a person may give someone their power of attorney, that person (the attorney in fact) may only act in the principal's best interest. The attorney in fact is accountable to the individual and will be held responsible for his/her acts when dealing with the principal's property and possessions. Without a power of attorney it could become necessary to have a guardian appointed by a court to handle the principal's affairs. Guardianship is an expensive procedure which can be avoided by planning in advance and executing a power of attorney. Also, if a child is placed on a bank account, he/she may become an owner, with the principal, of the account. The result is that, at the death of the principal, the contents of the account may be the child's. This result could lead to litigation among the children to determine the principal's intent regarding ownership of the account, that is whether the account is an estate asset for distribution to all the children or was it really intended for the child whose name appeared on the account. This can be avoided with the use of a well-designed power of attorney.
When preparing a power of attorney one needs to (1) decide to whom to entrust his/her financial affairs; and (2) determine how broad a power will be granted. The principal will also need to (3) decide when the power will take effect and, if it takes effect upon his/her disability, the circumstances that will apply. Consider also (4) who will be designated as an alternate attorney-in-fact in the event the primary designee cannot, for whatever reason, act or continue to act on the principal's behalf.
Advance Directive with Health Care Proxy (aka Living Will)
A living will is a document which sets forth the type of medical care and treatment an individual does or does not want to receive. It constitutes instructions to the person's healthcare providers (doctors, nurses, hospitals, etc.). The document speaks for the person when he/she is not able to speak for himself/herself.
In the State of New Jersey the living will may discuss healthcare issues which are not limited to "end of life decisions." For example, the document could say that the individual does not want a blood transfusion without first using all other treatment methods that could eliminate the need for a transfusion; that is, that the physician may only employ a transfusion after use of those other modalities have been attempted. In some other states, Pennsylvania included, the law only allows directions regarding end of life decisions. As a general rule, however, a living will, properly executed in any state will be honored in any other state.
The document can discuss not only the type of care the person does not want, but also the type of care the person does want. For example, a living will can say that the individual does not want cardiopulmonary resuscitation or that the individual does not want to be placed on a ventilator. It can also say the opposite, which is, that the person does want resuscitation or to be placed on a ventilator. It could also say, for example, that the person wants kidney dialysis or experimental drugs.
The living will only becomes operative when the individual is incapable of communicating health care decisions. So long as the individual can communicate health care wishes, the document is not consulted. In the event the individual becomes incapable of communicating (incapacitated), then the document is consulted to determine what the individual would have done under the circumstances confronting health care providers at that time.
In the event the document does not address the issues at hand, then the designated health care proxy is consulted. A health care proxy is a person the individual designates to speak for him/her when he/she cannot speak for himself/herself and when the living will is silent regarding the issues at hand. Choose a proxy carefully. This person must make decisions for the person based on the proxy's knowledge of the person and what the person would do if he/she could make the decision. The decision to be made by the proxy must not be based on emotion or passion. It must be the decision the individual would have made. While a proxy is usually a spouse with an alternate being a child, it could also be a close friend or advisor. Sometimes family members, due to the emotions involved, are not always the best people to serve as a proxy.
When preparing a living will with health care proxy, one needs to (1) determine the type of health care he/she does or does not wish to receive; (2) determine who will be designated proxy; (3) designate one or more alternate proxies; and (4) discuss with the proxies the individual's wishes regarding health care.
Long-term care planning and estate planning are important for everyone regardless of age or economic status. Without the proper planning, one's emotional and financial security will be in jeopardy. While, in most cases, the documents are relatively easy to create, one should be wary of "do-it-yourself" kits, internet sites and "off-the-shelf" documents. Poorly or incorrectly prepared and/or executed documents may cause the documents to fail. In most cases one only learns of the problem after it is too late to correct it. For example, a poorly drafted will only come to light after the testator dies, or a power of attorney which lacks certain, specified powers only becomes known after the principal is incapacitated and incapable of revising and executing a new power of attorney.
Seek the advice of a competent elder law attorney when preparing your long-term care plan and estate planning documents. And, if you move from one state to another, have the documents reviewed after the move to ensure compliance with the laws of the state in which you live.