2010 ESTATE PLANNING UPDATE
Happy New Year! For those of you who had a difficult time in 2009, I sincerely hope that 2010 will be a better year for you. Here is a 2010 update on important numbers used in Estate Planning and Medicaid Planning.
How much money and property can a person have at death without paying estate taxes? For someone who dies in 2010, everything is tax-free! There is no federal estate tax this year. But from 2011, only $1,000,000 is tax-free. Congress will probably change the estate tax law again in 2010. I will inform you in this column of changes.
How much can a person give away without paying a gift tax? Effective January 1, 2009, you can give $13,000 each year to each person without having to report it to the IRS. (The amount is still $13,000 in 2010.) You can give any amount to a husband or wife who is a U.S. citizen without reporting to the IRS. If you give more than $13,000 in 2010 to any person in one year, then the amount over $13,000 is a “taxable gift.” You have to file a gift tax return to report the gift, but you can give up to $1,000,000 of taxable gifts in your lifetime without paying a gift tax. However, if you give assets away, there will probably be a Medicaid penalty if you need nursing home care. Do not give away assets (not even your home) without expert advice about the effect of both gift tax laws and Medicaid laws.
How much in assets can a husband and wife have and still qualify for Medicaid to pay nursing home costs for one of them? Effective January 1, 2009, a husband and wife together can have $111,560 in assets and still have Medicaid pay for the nursing home costs for one of them. (The amount in 2010 is still $111,560.) This $111,560 is in addition to the following exempt assets, which the government will not count: necessities such as clothing, furniture and appliances; motor vehicles; funeral or burial plans; one burial plot for each family member; one wedding ring and one engagement ring, and up to $750,000 of equity in a home.
If a person is not married, or if both husband and wife need nursing home help, how much in assets can each have and still qualify for Medicaid for nursing home costs? A single person can have $2,000; a married couple can have $4,000.
If you give away assets to your children, how long do you have to wait before you can qualify for Medicaid for nursing home costs without a penalty? The answer is 5 years. (It is 3 years for transfers to individuals made before February 8, 2006.) However, this does not mean that you have to wait 5 years before getting Medicaid help. There are ways to reduce or eliminate the penalty period.
If a person qualifies for Medicaid for nursing home costs, how much of the family income can the spouse keep? The spouse who is not in the nursing home (“community spouse”) can keep all of his or her own income (social security checks, pension checks, etc.). If the income of the community spouse is less than $2,739 per month, the community spouse can also be given some of the income of the one in the nursing home to bring the community spouse’s income up to $2,739. (This figure was $2,739 in 2009 as well.) The one who is in the nursing home has to use the rest of his or her income towards nursing home costs, except for $50 a month, which can be kept.
When is a probate necessary? Probate is necessary if a person dies with real estate of any value in his name only or as a tenant in common. With assets other than real estate, probate is necessary if a person dies with assets worth over $100,000 which are not in a revocable living trust or joint account, and do not name a beneficiary.
© OKURA & ASSOCIATES, 2010
I would be interested to see future blogs on life estates.
@Lorna – My blog posted on March 20, 2010 on Protect Your Home From Medicaid Liens introduces the subject of how a life estate can protect the home from nursing home costs. Tomorrow (April 16, 2010) I will be posting a blog that goes into much more depth on life estates in an article that will be entitled Protect Your Home From Medicaid Liens (Part 2). I’d be interested in your comments after you read it.
I am curious.
1) Medicaid — My mother’s house has me listed as a co-trustee. If our home is valued at just under a million dollars, how can we protect the house and still qualify for medicaid if needed in the future? I am trying to protect the house for my daughter.
2) TSA account – we will probably have up to $500,000 in a TSA account upon retirement in about 4 years. Are there are any loopholes to protect this income for my daughter. We are trying to save this money for my daughter.
3) Inheritance taxes — My mother only has her house (valued at just under a million dollars), two life insurance policies, and a very small savings account ($20,000).
Is a life insurance policy taxable?
Does it look like I will need to pay any estate taxes?
much aloha – michelle
@Michelle – 1) Medicaid – The best way to protect the home and still have mother qualify for Medicaid for nursing home costs in the future is to have mother transfer it to an irrevocable trust with you as trustee, with your mother retaining a life estate. If your mother does not apply for Medicaid for nursing home costs within 5 years after the transfer, the home should be safe. If mother ends up in a nursing home on Medicaid, a Medicaid lien will still be placed on the home, but we would be able to have it removed after her passing. However, if the estate tax law does not change, and only one million dollars of assets are exempt from the estate tax next year, then we have to be careful that at the time of mother’s passing the value of her assets does not exceed a million dollars. It is possible to have mother transfer a substantial portion of the the home, but not the entire amount, to legally but artificially reduce the value of the home, to protect against estate taxes. Exactly how to do this would require a careful analysis.
2) TSA Account – I may have some incredibly good news for you. Our law firm has recently developed a technique for converting a traditional IRA into a Roth IRA while greatly reducing the income taxes payable upon the conversion. Many articles have been written about whether you should convert to a Roth IRA, but I have never seen anyone suggest the technique which we have developed, which makes a Roth IRA conversion a must for almost everyone with a large retirement account. A TSA (403(b))Account generally can be converted. The article I will be posting on this website on the 3rd Friday of July will be on this subject. Attorneys from our law firm will be presenting seminars in Honolulu on July 23 and 24, 2010 on How To Convert to A Roth IRA Without Paying Huge Taxes. On those same two days, attorneys from our law firm will be presenting seminars on How To Protect Assets from Nursing Home Costs. If you are able to attend, you may register by phoning our Honolulu office at (808) 593-8885.
3) Inheritance Taxes – The death benefits of life insurance policies will be taxable by the estate tax if the policies are owned by your mother at the time of death. It is possible to avoid the tax on the insurance proceeds if mother transfers the ownership of the policies out of her name and then lives for at least 3 years after the transfer. It sounds like your mother could use an estate planning consultation. If you are unable to attend the seminars on July 23rd and 24th, she should probably make an appointment for an estate planning consultation.