Source: http://specialneedsnj.com/category/uncategorized/
Timestamp: 2019-04-22 00:43:42+00:00

Document:
Per Internal Revenue Code section 61 all income is subject to income tax unless excluded in tax law. Therefore, a settlement is taxable income unless the taxpayer proves that an exception applies.
Internal Revenue Code section 104 provides that damages that compensate an individual for personal physical injuries or physical sickness are not taxable income. However, Internal Revenue Code section 104 does not exclude from income damages for personal injuries that are not physical.
Fortunately, Congress and the IRS agree that damages for non-physical injuries are not taxable when they flow from a personal physical injury. H. Conf. Rept. 104-737, page 301 and Internal Revenue Service income tax regulation 26 C.F.R. 1.104-1(c)(1). For instance, a parent’s damages for emotional distress from seeing her child maimed by a reckless driver normally should not constitute taxable income.
Code §104 does not exclude from taxable income damages for emotional distress not derived from a physical injury even if the emotional distress leads to physical injury or physical sickness. Therefore, damages for emotional distress due to professional malpractice in settling a claim for divorce normally should not be excludable under Code §104.
Where a plaintiff sues for both punitive damages and compensatory damages, IRS may maintain that some of the damages are taxable punitive damages. While plaintiff and defendant may agree how to allocate a settlement, IRS is not bound by self serving allocations. Nevertheless, tax counsel may find ways to minimize taxation as punitive damages.
Where damages are personal rather than business in nature, attorney fees to obtain the damages are not deductible. For instance, when a building owner sues a plumber for faulty work, the attorney fees will not be deductible if the building is plaintiff’s home but they may be deductible where the plumber caused plaintiff’s business to flood.
Damages for a personal injury that isn’t physical are taxable income, and attorney fees to recover personal damages are not deductible. Therefore, an individual who recovers damages for a non-physical personal injury must include the full settlement in taxable income even if the defendant pays part of that settlement to the individual’s attorney to cover the individual’s attorney fees.
The above analysis leads to the following conclusions.
1. Punitive damages normally are taxable income, but bringing in tax counsel early in a case may limit the tax.
2. Non-punitive (i.e. compensatory) damages can be taxable income or excluded from taxable income.
3. Compensatory damages due to personal physical injuries or physical sickness are not taxable income.
4. Compensatory damages due to non-physical personal injuries or sickness are taxable income unless the injury flows from a physical personal injury or sickness such as emotional distress due to a loved one’s physical personal injury.
5. Even if all damages are taxable, a plaintiff may not deduct legal fees to obtain damages that don’t relate to a business.
FriedmanLaw can help you determine whether a settlement may be taxable and limit any tax.
Original Medicare covers hospitalization, professional fees and other common health care costs. Many participants in Original Medicare also purchase Medicare Supplement (a.k.a. Medigap) insurance policies to cover Original Medicare’s deductibles and co-payments and expand coverage for blood and international travel. Unlike Original Medicare, Medicare Advantage Plans are sold by private insurers and are managed care plans (along the line of the employee benefit group health care plans provided by many employers). Medicare Advantage Plans provide the benefits of Original Medicare and sometimes add additional benefits (like vision care or gym subsidies).
The principal advantage to Original Medicare is greater control over your own care. You don’t have to convince a managed care organization to approve costly surgery or other care and can choose facilities and providers without worrying whether they are in-network. The principal advantages to Medicare Advantage Plans are lower premiums and avoidance of high deductibles and co-pays.
Original Medicare is available everywhere in the United States whereas Medicare Advantage Plans may have limited coverage areas and availability. You may be forced to switch plans or return to Original Medicare if you move or your Medicare Advantage Plan ceases to serve a locale or goes out of business.
Original Medicare covers all providers and facilities that accept Medicare with no networks and no referrals required. Medicare Advantage Plans may limit providers and facilities to networks and require referrals and to see a specialist or obtain certain kinds of care.
Medicare Advantage Plans manage care. Therefore, they sometimes refuse to cover treatments that would be eligible for coverage by Original Medicare.
Medicare Advantage Plans typically have lower costs than Original Medicare. Original Medicare has co-payments such as 20% for most Part B benefits and over $300 per day for hospital stays after 61 days. There also is a Part A deductible of over $1,000 for each hospital admission and relatively small deductibles for Parts B and D as well.
Original Medicare participants must purchase Medicare Supplements (a.k.a. Medigap insurance) if they want to avoid costly deductibles and co-payments. Participants in Medicare Advantage Plans don’t need (and can’t buy) Medigap policies.
Except for very limited situations, Original Medicare does not cover care outside the United States. Medicare Advantage Plans can (but don’t have to) cover care outside the U.S.
If you initially choose a Medicare Advantage Plan, you risk an unpleasant surprise on later switching to Original Medicare. Many people initially choose Medicare Advantage Plans to save money, but as health declines with age, the limitations of managed care may prove more of a concern. Therefore, some participants in Medicare Advantage Plans may want to switch to Original Medicare during the general Medicare open enrollment period or the separate Medicare Advantage open enrollment period.
When switching from a Medicare Advantage Plan to Original Medicare you also must buy a Medigap policy (a.k.a. Medicare Supplement) or face potential high hospitalization deductibles, additional high costs for hospital stays beyond 61 days, Part B co-payments, and other costs.
During a Medigap open enrollment period (typically but not always when you first enroll in Medicare), you may buy a Medicare Supplement policy at standard premiums regardless of health or pre-existing conditions. Except in limited circumstances, beyond your Medigap open enrollment period, insurers may refuse to sell you a Medigap policy or charge higher premiums if your health is bad.
Once you have a Medigap policy, the insurer can’t charge more because your health declines. Therefore, provided you buy a Medicare Supplement policy during your Medigap open enrollment period, you can keep it at standard rates for the rest of your life even if your health becomes precarious.
For instance, Medicare Advantage Plans’ lower premiums or broader benefits may seem attractive while healthy, but networks, referral requirements, and limitations on costly care may lead a Medicare Advantage participant to switch back to Original Medicare if he/she becomes seriously ill. But the very illness that causes an individual to switch from an Advantage Plan to Original Medicare may make it impossible or too expensive to obtain a Medigap policy. In that case, there can be hefty deductibles and co-payments such as 20% of many Part B charges.
As with so much of elder law, there is no obvious one size fits all choice between Original Medicare or Medicare Advantage Plan. No question that you can save some money by buying a Medicare Advantage Plan. But are you willing to let strangers who administer a Medicare Advantage Plan decide what care you can and can’t have? FriedmanLaw can apply our extensive knowledge of Medicare to help you choose coverage that is right for you.
A qualified income trust (sometimes called a QIT or Miller trust) may help you get Medicaid even if your Medicaid countable income exceeds Medicaid limits. However, not everyone is a candidate for a qualified income trust / QIT and not every QIT / Miller trust will lead to Medicaid approval. To succeed, a qualified income trust / Miller trust must be drafted, funded, administered, and spent correctly.
A QIT / Miller trust must be drafted in accordance with both Medicaid guidelines and New Jersey’s Uniform Trust Code or it will not lead to Medicaid eligibility. To be administered and spent properly, the trust must pay solely for expenditures allowable under Medicaid rules. These include certain care costs, medical expenses facility charges, and some other kinds of purchases. You may lose Medicaid if your qualified income trust pays for items not allowed by Medicaid authorities.
To properly fund a QIT / Miller trust, all of each income item that would cause Medicaid countable income to exceed Medicaid limits should be deposited into the qualified income trust. However, while you are not required to place every receipt into the qualified income trust, if you deposit any of a particular income item into the QIT, you must put that entire item into the Miller trust. Partial deposits are not allowed. For instance, you may choose to deposit into the QIT both your pension and Social Security or only one of your pension and Social Security, but you can’t place only part of the pension or part of the Social Security into the qualified income trust.
In many cases it will be advantageous to deposit all of your monthly income into the Miller trust/ QIT. However, if income would be left in the QIT after paying out all amounts authorized by Medicaid authorities, savings could prove greater if you don’t deposit all income items into the QIT. This is due to the interplay of QIT and Medicaid gift penalty rules, which is far too complex to discuss further in brief blog post.
Like so much of Medicaid planning, Medicaid qualified income trust rules contain many traps for the unwary. Therefore, it is risky to do it yourself without professional guidance. FriedmanLaw welcomes your inquiries on Medicaid planning and QITs / Miller trusts.
The Appellate Division of the Superior Court of New Jersey laid to rest two vexing Medicaid planning issues in C.W. v. Div. of Medical Assistance and Health Servs. (Aug. 31, 2015 #22-2-7790) Since nursing homes average over $10,000 per month in New Jersey and Medicaid is the only government program that funds long term care, these rulings should be of more than passing interest to anyone with a loved one in failing health.
C.W. v. Div. of Medical Assistance and Health Servs. dealt a death blow to two areas of contention. First is whether the Medicaid disqualification penalty period due to gifts is recalculated as the average cost of nursing home care changes from year to year. The second question is whether a penalty period is reduced when some (but not all) gifts within the lookback period are returned.
To understand these issues, we first must consider how one qualifies for Medicaid. Medicaid eligibility is discussed in detail under the www.SpecialNeedsNJ.com elder law drop down menu, but we’ll summarize two key bones of contention in C.W. v. Div. of Medical Assistance and Health Servs.
An individual must satisfy both financial and care requirements to obtain Medicaid to fund long term care. Thus, resources and income of a Medicaid applicant (and spouse in most cases) must fall within Medicaid caps. However, where the applicant asks Medicaid to fund long term care, gifts by either spouse during a lookback period are taken into account. The lookback period is roughly the 60 months prior to application in addition to the application date forward.
Non-exempt gifts during the lookback period disqualify the applicant for roughly a month of Medicaid funded long term care for each $10,000 gifted by either spouse. The $10,000 divisor represents average nursing home costs in New Jersey so it varies from year to year.
The divisor can increase quite a lot if the gift is early in the lookback period and nursing home costs rise substantially during the lookback period. For instance, if gifts total $120,000 and the gift divisor is $10,000 per month, the long term care Medicaid disqualification penalty period would be 12 months. However, $120,000 in gifts would trigger only a 10 month penalty period if average monthly nursing home costs rose to $12,000.
As the examples show, the higher the divisor, the shorter the penalty period. Since average nursing home costs tend to increase over time (often much more than general inflation), applicants generally could qualify for Medicaid sooner if gift penalties were based on current divisors rather than staying static from the start of the penalty period.
Rather than start when gifts are made, the Medicaid gift penalty period is deferred until the individual both has applied for Medicaid and would receive Medicaid to fund long term care but for the gifts that trigger the penalty period. Thus, the penalty period wouldn’t start until June 2016 if the applicant’s spouse gifted $250,000 in August 2015 but excess resources weren’t spent down and a Medicaid application filed until the end of May 2016. Since the penalty period would cover multiple years this raises the question whether the penalty period is based on the average nursing home cost in 2016 or is recalculated each year with the new annual divisor.
In C.W. v. Div. of Medical Assistance and Health Servs., the Appellate Division held that once the penalty period starts, it continues to run and isn’t shortened even if the gift penalty divisor rises in the interim. Even a new Medicaid application doesn’t allow for the penalty period to be recalculated.
The Appellate Division’s second holding may prove even more vexing. The court ruled that a penalty period need not be reduced when some but not all gifts within a lookback period are returned. Thus C.W. argued that the Medicaid penalty period should be reduced pro rata when gifts are returned. For instance, if mom gave her son $180,000 in May 2015 and the son either returned $80,000 to mom in December 2015 or spent $80,000 on mom, C.W. would say the penalty period should be based on $100,000 rather than $180,000.
The Appellate Division rejected partial penalty abatement and held that the penalty period is unchanged where only some gifts within the lookback period are returned. In addition, the court held that a gift penalty still applies where a gift recipient deposits the gift in the recipient’s name but spends it on the donor.
So, what should we learn from C.W. v. Div. of Medical Assistance and Health Servs.? The most important lesson is a principle we have stressed throughout our website– do it yourself long term care or Medicaid planning is incredibly risky. Errors that might seem inconsequential to a lay person can prove catastrophic. Spouses should seek Medicaid counsel before making significant gifts whenever there is reason to fear that either spouse may need long term care in the next 60 months or so.
Administering an estate can be a daunting task. Where the decedent leaves a will, the person(s) named as executor(s) must probate the will and fulfill the duties of the estate personal representative. Where there is no will, the Surrogate’s Court appoints an administrator to fulfill these obligations. Either way, the executor/administrator must settle the decedent’s debts and obligations, safeguard income and assets, file required tax returns, address guardianships/trusts for minors and beneficiaries with special needs, and distribute the estate according to law. It can be a lot of work– even more so if trusts are involved.
Although New Jersey has some of the country’s most user friendly will and estate laws, the process is anything but intuitive. For instance, an executor/administrator can have personal liability if he distributes before the creditor claim limitation period runs and even, thereafter, if distributions aren’t wholly correct.
New Jersey law requires an executor/administrator to obtain and file a refunding bond before distributing. The executor/administrator also must obtain a qualifying child support judgment search and resolve any child support judgments that turn up. An executor/administrator who ignores these obligations risks substantial personal liability. In addition, to foreclose claims down the road, the executor/administrator should obtain releases from beneficiaries or settle an account in court.
Depending on estate beneficiaries, assets, income, deductions, and tax deposits, the executor/administrator of an estate may be liable to pay tax and file estate tax returns and/or inheritance tax returns as well as final income tax returns for year in which decedent died and fiduciary income tax return thereafter. As estate attorneys, we normally prepare our clients’ estate tax returns and inheritance tax returns and determine tax. Where appropriate, we can suggest strategies [such as disclaimers] that can reduce tax.
Federal tax laws require IRAs and many other retirement plans [401(k), pension, profit sharing, SEP. government plans, and other benefit arrangements] to distribute required minimum distributions (RMD) once an individual reaches age 70.5 and thereafter. Thus, unless a decedent has taken the full RMD, an estate may have to take RMDs for the year in which a decedent dies. Beneficiaries may face RMDs thereafter. When RMDs aren’t made, expensive tax penalties can arise.
While I could go on and on about tasks that must be performed to administer an estate properly, the point of this article is to show that what may first appear to be a simple task carries with it many less obvious obligations. At FriedmanLaw, we apply our years of experience in trust and estate law to guide executors/administrators through the steps needed to settle an estate. We also take obligations (such tax compliance) off our clients’ hands.
In short, if you may become an executor/administrator, we would look forward to working with you to settle the estate correctly and limit your workload.

References: §104
 §104
 v. 
 v. 
 v. 
 v. 
 v.