Estate Planning Update 2019

By: Ethan R. Okura

Hawai‘i Herald Columnist

Happy New Year! The following is a 2019 update on important numbers used in estate planning and Medicaid planning in Hawai‘i.

How much money and property can a person have at death without paying estate taxes? At the end of 2017, Congress passed a new tax bill which the president signed into law. It doubled the previous estate and gift tax exemption from $5 million to $10 million (adjusted for inflation). Taking into account inflation, read more

The Role of the Successor Trustee: What Am I Supposed to Do Now?

The Role of the Successor Trustee: What Am I Supposed to Do Now?

By

Ethan R. Okura

 

We have often seen this scenario:  A parent, sibling, or dear friend has finally gotten around to doing their initial estate planning. You are so happy for them. And then you find out you’ve been named as their “successor trustee.” What does that even mean? What are your responsibilities? How will you know what to do when the time comes? When exactly does that time come? What exactly is a trust in the first place? Relax. There’s an orderly process you can follow to understand your responsibilities as a successor trustee and how you can play your part to make that loved one’s transitions in and through life go smoothly.

Let’s start with, “What is a trust?” A trust is a legal agreement between the person setting up the trust, usually called the “Settlor” and the person assuming responsibility for managing the trust assets, called the “Trustee.” In the vast majority of estate plans, which involve a revocable trust—which can be cancelled or amended at any time—the person creating the trust also names herself as the initial trustee. The final group of people involved with each trust is the beneficiaries. Usually, the Settlor is also the only initial beneficiary of the trust. Then after the Settlor passes away, her spouse, children, other family members, and/or other friends and loved ones become the beneficiaries.

When the Trustee can no longer act as Trustee for himself or herself because of disability, incapacity, or death, then the Successor Trustee (or more than one “Co-Trustees”) named in the Trust document is called upon to take over.   Unfortunately, even though the Successor Trustee may be an individual in whom the Settlor had great trust and faith in being able to handle the affairs of the Trust, most Trustees have never done this before and really have no idea what to do or how to do it.   Many Settlors, as well as Trustees, may even think that the Revocable Trust will automatically take care of everything by itself, without any work involved by anyone!

The main objectives of a revocable trust based plan are:

  • Distribute the Settlor’s assets to the right people, in the right amounts, at the right times and in the right manner appropriate for each of them, without the delays and expenses of Probate Court involvement.
  • Manage the Settlor’s assets for him or her in the event of his or her disability or incapacity, and to manage those assets for the people who will later inherit them (until such time

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Aretha Franklin: Following in Prince’s Footsteps to Pay Millions in Death Taxes

Aretha Franklin: Following in Prince’s Footsteps to Pay Millions in Death Taxes

By

Ethan R. Okura

 

A little over two years ago I wrote about Prince, the music recording legend, and how he passed away without a will. I detailed some of the problems that his estate would face—and is still facing to this day—on account of not adequately preparing. As of April, 2018, Prince’s six heirs had not received one red cent, while the bank acting as executor of the estate and its team of lawyers had already collected $5.9 million in fees and expenses, and had requested at least an additional $2.9 million more be approved by the court. Considering that court documents estimate Prince’s estate may have been worth approximately $200 million, and about half of that will ultimately go to the IRS and the State of Minnesota for estate taxes, there may be very little left for each heir when all is said and done.

Well, history repeated itself last month as the Queen of Soul, Aretha Franklin, joined the ‘Chain of Fools’ and also passed away without a will or a trust. Aretha Franklin’s estate has an estimated value of $80 million. She had four sons who are named as potential beneficiaries of her estate in the documents filed in a Michigan probate court. They can ‘Say a Little Prayer’ that there won’t be any legal battles as there have been with Prince’s estate. Nevertheless, her estate will pay to the IRS taxes of about 40% of the amount over the $11.8 million in estate tax exemption available in 2018—an estimated $27.5 million in addition to court and legal fees. If I were her, I’d be ‘Rolling in the Deep’ having to pay such a large sum in taxes unnecessarily simply because of poor planning.

Aretha Franklin was very private about her financial affairs. I imagine that if she had known that she was about to pass away as a ‘Natural Woman’, and that her finances would all become a matter of public record in probate court, and in addition, that her estate would pay about $34 million in taxes, that there ‘Ain’t No Way’ she would have continued to ‘Rock Steady’ without doing appropriate estate planning. This is especially so because one of her heirs, Clarence, has special needs. One of her lawyers even tried to get her to create a will and a trust, but she never followed through.

Now that Prince’s and Aretha’s heirs and executors are trying to build a probate ‘Bridge Over Troubled Water’ to settle their estates, hopefully the heirs will still end up with a decent inheritance, and preserve the ‘R-E-S-P-E-C-T’ that these famed musicians rightfully earned during their esteemed careers.

If you also follow in their footsteps, it’s possible that your intended beneficiaries might not get the inheritance that you wanted to leave them; there can be long delays before your heirs receive anything; fights might break out among your family members; and even if you don’t have enough assets to incur an estate tax, your financial information will all become publicly available. If you have a child with special needs (or who develops disabilities later in life), she or he may end up losing government benefits she or he could otherwise qualify for when inheriting assets directly from your estate instead of protected in a special needs trust.

A 2017 study showed that 60% of adults don’t even have a will or a living trust. This figure includes 64% of Generation X, and 42% of Baby Boomers! When asked why they hadn’t even done the basics, the most common answer was, “I haven’t gotten around to it yet.” This data is on par with what we see among new clients coming to our law firm, Okura & Associates Estate Planning Attorneys. If you have been putting it off, don’t become one of these statistics. See an estate planning lawyer right away to get the process started.

 

© OKURA & ASSOCIATES, 2018

“UNDUE INFLUENCE” AND OTHER WILL PROBLEMS

“UNDUE INFLUENCE” AND OTHER WILL PROBLEMS

By:

Ethan R. Okura

 

In previous columns, I have addressed the subject of financial abuse of the elderly. This usually involves outright stealing or fraud. However, there is another form of financial abuse that is subtler, harder to identify and often doesn’t show up until after the beloved family member has passed on. This type of problem is called “undue influence.”

 

What is “Undue Influence?”

Black’s Law Dictionary defines “undue influence” in these words: “In regard to the making of a will and other such matters, undue influence is persuasion carried to the point of overpowering the will, or such a control over the person in question as prevents him from acting intelligently, understanding, and voluntarily, and in effect destroys his, and constrains him to do what he would not have done if such control had not been exercised.”

California Probate Code Section 86 and California Welfare and Institutions Code Section 15610.70 define undue influence as “excessive persuasion that causes another person to act or refrain from acting by overcoming that person’s free will and results in inequity.”

What that means in plain English is that sometimes an unscrupulous person will manipulate another person who is dependent on them or otherwise vulnerable in such a way that the unscrupulous person will benefit or profit from the fact that the other person is dependent or vulnerable. In other words, it’s when someone puts inappropriate pressure on someone else to get him or her to do something that they wouldn’t do otherwise.

 

Examples of Undue Influence

Although undue influence can occur while executing a contract or a real estate transaction, it most often comes up in the contesting of a last will and testament. One of the most notorious Hawai‘i cases in recent times involved the Estate of Herbert, a case that the Hawai‘i Supreme Court decided on March 17, 1999.

In this case, an elderly woman named Ms. Herbert had written a will in September of 1988, leaving all of her assets to her local church upon her death. Ms. Herbert had a 26-year-old Canadian caregiver named Hanno Soth, who assisted her with doctor visits, taking prescription medication and even managing her finances beginning in December 1989 until her death. Hanno Soth apparently had Ms. Herbert change her will in December of 1989, leaving everything — over $1 million — to him. This happened during the two-week period when Ms. Herbert’s live-in housekeeper was out of state on a vacation. Soth later fired the housekeeper, whose last day of work happened to be three days before Ms. Herbert passed away. At trial, there was even testimony that Soth had spent the night at Ms. Herbert’s home for the first time the night she died. These are very suspicious circumstances.

Friends, neighbors, the housekeeper, and Ms. Herbert’s doctors and lawyers testified that when the new will was signed, Ms. Herbert did not have sufficient mental capacity to understand what she was signing — or to even remember the next day what she had signed. The court decided that Ms. Herbert did not have the mental capacity to change her will at that time, was mistaken about what was written in it and was unduly influenced in its execution. Thus, the caregiver, Mr. Soth, did not succeed in inheriting her assets.

Another example is more recent. It involves Princess Abigail Kawananakoa (known as “Kekau”), the closest living relative to Queen Liliuokalani. The queen was Kekau’s great-aunt. There has been a legal battle brewing between Kekau’s longtime domestic partner and now-wife, Veronica Worth, and Kekau’s former attorney, James Wright. He petitioned the court, asking that Kekau, now in her 90s, be prevented from controlling her trust after she suffered a stroke. Kekau herself sent a handwritten letter to a local news outlet insisting that it was only a minor stroke and accused her attorney of mismanagement. Her estate is worth over $200 million. You can see why many people are concerned about what happens to it. The attorney claimed to be protecting Kekau from “opportunists and interlopers,” perhaps referring to Kekau’s now-spouse, Ms. Worth.

Although Kekau’s stroke was real, whether it left her incapable of managing her affairs is the question before the courts. Although she insists that she is still competent, at least two medical experts appear to have found her lacking mental capacity. Now, the three board members of the Abigail K.K. Kawananakoa Foundation — a charitable organization that is expected to inherit large sums for the benefit of Native Hawaiians upon Kekau’s death — are also attempting to intervene in the management of Kekau’s trust in order to protect the future interests of the foundation. In this case, Kekau’s former attorney, James Wright, is claiming that he worries that Worth is exercising undue influence over Kekau to benefit from her estate. Worth, on the other hand, claims that Wright is the one trying to take advantage of Kekau’s estate. The court will ultimately settle the dispute.

In these types of cases, it’s hard to know for sure whether there actually were bad actors or just people trying to look out for the elderly person’s best interests as they perceived those interests evolving. Regardless, it’s important to communicate your wishes with multiple friends and family members early, so that they know your intentions.  It’s also important to establish a good relationship with an estate planning firm that will likely be around when you might become incapacitated so that there is a clear record of your plan and whom you trust to carry out that plan for you.

 

© OKURA & ASSOCIATES, 2018

An Ethical Will: The Importance of Passing Down Your Values, Not Just Your Assets

An Ethical Will: The Importance of Passing Down Your Values, Not Just Your Assets

By

Ethan R. Okura

 

 

Have you heard the proverb “Shirtsleeves to Shirtsleeves in Three Generations?” Or perhaps you’ve heard the saying as “Rags to Riches to Rags in Three Generations.” The ancient Chinese version of this Proverb is 富不过三代 (Fu bu guo san dai), which roughly translates to “Wealth does not sustain beyond three generations.” Various cultures throughout history have seen this same pattern. The first generation creates success and builds wealth, the second generation preserves and transfers it, and the third generation (or sometimes subsequent generations) spends it until it is all gone. Why is this pattern so universal? Is there anything we can do to change this outcome? Today we will look at this issue and how to overcome it.

At Okura & Associates, we have seen many families’ estates; some through multiple generations. The fundamental problem here is one of education, knowledge, and personal or family values. Whether the size of the estate represents a modest amount of wealth (under one million dollars including the home), or a high degree of financial success (tens of hundreds of millions of dollars), we often encounter this phenomenon in our clients’ lives.

Usually, the first generation that creates family wealth has deeply ingrained values of thrift, frugality, hard work, and tenacity. They really appreciate the value of a dollar because they know first-hand how hard it was to save up the first bit of capital that they used to create the financial success they ultimately achieved. Often, the second generation grew up without much to start with and saw their parents working hard to achieve that degree of success, benefiting from it only later in their lives, if at all. Usually, the third generation starts off life accepting the fact that the family has access to money and other resources, and they tend not to ever know financial hardship in the same way that the first or second generation did. Sometimes they are raised in a very entitled or spoiled manner.

Traditionally, Estate planning has only been concerned with the mechanics of passing on wealth to heirs while minimizing estate and gift taxes, and avoiding probate. What we have come to realize in the modern era of estate planning is that it is also important to pass on family values and knowledge. Families that have dynastic wealth surviving many generations tend to do things such as:  Bringing in the next generation to learn how to operate and ultimately take over the family business from early on; involving the children in discussions about family finances, where to spend money, and how to invest it; and discussing what charitable causes and institutions the family will support.

Although this process should start well before one’s death, it can often be helpful to prepare an Ethical Will or a Legacy Letter—a document intended to pass on one’s values, wisdom, and love to future generations. This is not a legal document intended to enforce any restrictions on the use of an inheritance or demand certain actions of family members, but rather stands as a statement of life purpose, family history, and cultural or spiritual values. Even though it doesn’t carry any legal weight, taking some time to write a thoughtful Ethical Will or Legacy Letter can help to clarify your goals, values, and vision, allowing you to better work with your lawyer about how you want to design your estate plan. Some clients use it as a guide to subsequently include restrictions in their will and trust that require children and grandchildren to be drug tested, graduate from college, and/or be working a full-time job before they are eligible to receive any inheritance from their share of the trust.

Historically, an ethical will stems from early Judeo-Christian traditions. There are examples of such in the bible and have continued as a practice to this day, especially amongst the Jewish community. A non-religious modern example comes from President Barack Obama who wrote a Legacy Letter to his daughters on January 18, 2009.

Even if each generation does its best to teach the succeeding generation the value of working hard, saving for the future, and investing wisely, the lessons don’t always stick. Sometimes the previous generation does not have the right knowledge to teach their children how to preserve wealth in a new era, even if they did have the know-how to acquire and accumulate it in decades past. Regardless, we find that those who take the time to pass down family values, and incorporate their descendants early on in the process of financial and business management tend to see their generational wealth continue a lot longer than the standard return to poverty by the third generation.

 

*For more information on Ethical Wills/Legacy Letters, see the following web pages: https://celebrationsoflife.net/ethicalwills/

https://www.everplans.com/articles/how-to-write-an-ethical-will

 

© OKURA & ASSOCIATES, 2018

How To Apply For Long-Term Care Medicaid

HOW TO APPLY FOR LONG-TERM CARE MEDICAID

By:

Ethan R. Okura

 

In last month’s column, I focused on the history of Medicaid and discussed some of the difficulties that arise when dealing with Medicaid’s many laws, rules and policies. I also told you about some of the problems that people have encountered when applying for Medicaid on their own or without proper guidance.

In this column, I’ll go over the steps you will have to take when applying for Long-Term Care Medicaid on your own.

Application

In order to qualify for LTC Medicaid, you must meet the following criteria:

  • Be a United States citizen or a “qualified alien” (permanent resident for five years).
  • Be a resident of the state of Hawai‘i.
  • Have a Social Security number.
  • Be age 65 or older, or blind or disabled.
  • Require nursing facility level of care.
  • Meet asset requirements.

Once you are certain that you meet all of the aforementioned criteria, you can submit your Medicaid application. There are a number of required and optional forms to fill out when applying for LTC Medicaid, starting with the Hawai‘i Department of Human Services’ Form 1100. This is the basic Medicaid assistance application form. When applying for long-term care, you will also have to submit all of the following forms:

  • DHS 1100B: Supplemental form for long-term care services.
  • DHS 1167: Statement of intent for applicants in long- term care facilities.
  • DHS 1169: Evaluation for placement of liens.

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WHAT OUT OF STATE CHILDREN NEED TO KNOW TO HELP THEIR AGING PARENTS IN HAWAII

WHAT OUT OF STATE CHILDREN NEED TO KNOW TO HELP THEIR AGING PARENTS IN HAWAII

By

Ethan R. Okura

 

We often have clients who raised their families here in Hawaii, and then sent their children off to the mainland or elsewhere in the world to pursue their educations, careers, military service, or raising families of their own.  Although the children try to get back to visit Hawai`i nei once every year or two, life gets busy, and that doesn’t always happen. Even for those who do manage to come back once a year, as their parents start aging, it’s generally not often enough to really make sure that their parents are safe, healthy, and happy.

Statistics from the U.S. Department of Health and Human Services, Administration on Aging, show that for those over 65 years in age, 20% of men and 36% of women live by themselves. These numbers increase drastically with age, as almost half of all women over age 75 live alone. There are several risks that our elderly parents face which become more severe when they live alone.  Some of these risks are:

 

  • Social isolation – Lack of contact and interaction with others, increases the chances of suffering from depression, anxiety, loneliness, heart disease, high blood pressure, and mental deterioration. Often, being alone, the parent doesn’t even notice these symptoms and no one else is there to witness it either.
  • More likely to be poor – There might be several factors contributing

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THE TAX CUTS AND JOBS ACT

THE TAX CUTS AND JOBS ACT

By

Ethan R. Okura

 

In November 2017, I wrote an article about the proposed Tax Cuts and Jobs Act (TCJA). There were quite a few changes laid out in the proposed new law and there has been a lot of confusion as the bill went through several revisions before finally being passed into law. Many of the initially proposed changes were not implemented as originally expected. Last Month I wrote about how the new law temporarily doubles the estate tax exemption letting each of us give away during life, or pass away owning, up to $10 million (adjusted for inflation) without any gift or estate tax. Today we will talk about some of the income tax aspects of the law and how they might affect us today.

The old tax rates for the various brackets were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The new rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.  Most taxpayers will do better with the new brackets and rates, with a few exceptions. For example, individuals with income over $157,500 will be bumped up from the 28% rate to the 32% rate, and those with income over $200,000 will be bumped up from the 33% rate to the 35% rate. For married couples filing jointly, the only ones who will pay more are couples making between $400,000 and $416,700. They will get bumped up from the 33% bracket to the 35% bracket.

Some other big changes that will affect many is the doubling of the standard deduction to $12,000 (single), $18,000 (head of household), and $24,000 (married filing jointly); and the elimination of many other deductions that were previously available. Personal and dependent exemptions are eliminated. Miscellaneous itemized deductions subject to the 2% floor such as tax preparation expenses and employee business expenses have been eliminated. Personal casualty and theft losses are also eliminated. Alimony payments under new divorce decrees established after Dec 31, 2018, are not deductible. And moving expenses are no longer deductible (except for active-duty military who have orders to relocate).

Some deductions have just been limited or modified, such as a $10,000 total cap on deductions for State and local income, sales, and real property taxes paid. Home equity loan interest is no longer deductible, and interest on new mortgages taken out after December 14, 2017 is only deductible for up to $750,000 worth of mortgage principal borrowed. Interest on pre-existing mortgages that were new or refinanced before December 15, 2018 will continue to be deductible for up to $1,000,000 of mortgage principal borrowed.

Two positive moves in itemized deductions are regarding charitable contributions and medical expenses. Donations to charities used to be limited to 50% of your adjusted gross income (AGI), now you may deduct up to 60% of your AGI for charitable contributions. Medical expenses (such as doctor, chiropractic, psychiatric, dental, and vision care; prescription medicines, glasses, contacts, hearing aids, dentures; and long term care nursing home expenses) which are not reimbursed by any insurance are deductible to the extent that they exceed 7.5% of your AGI. Prior to this new tax law change, only your medical expenses in excess of 10% of AGI would have been deductible for 2017 and on. This reduced 7.5% hurdle is good for 2017 and 2018. Starting in 2019, we will only able to deduct medical expenses over 10% of AGI.

Another benefit is the elimination of the tax penalty assessed under the Affordable Care Act (Obamacare) for not getting health insurance. The penalty will still apply for 2017 and 2018, but starting in 2019, individuals may choose to not obtain individual health insurance and pay no tax penalty.

The final major benefit that can affect many small business owners is the 20% deduction on Qualified Business Income from a sole proprietorship, partnership, or S-Corporation, (or an LLC that elects to be taxed as any of the above). The rules related to the Qualified Business Income deduction are a bit complicated, but if you do own or want to start a small business, you could benefit from some tremendous tax savings under this new deduction. Please see a qualified attorney or tax specialist to plan on how to best take advantage of this opportunity.

So we see that there are a lot of changes with this new tax law, most of which are set to expire at the end of 2025. After that, most of these itemized deductions rules will return to the previous version, starting in 2026, unless Congress acts to extend portions of this law.

 

© OKURA & ASSOCIATES, 2018

 

Estate Planning Update 2018

ESTATE PLANNING UPDATE FOR 2018

By:

Ethan R. Okura

 

Happy New Year! The following is the 2018 update of important numbers used in estate planning and Medicaid planning in Hawai‘i.

How much money and property can a person have at the time of death without paying estate taxes?

At the end of 2017, Congress passed a new tax bill, which the president signed into law. We will discuss some of the income tax changes in detail in next month’s column. One of the main impacts of this new law, however, is that it doubles the previous estate and gift tax exemption from $5 million to $10 million (adjusted for inflation). Taking into account inflation, the actual amount exempt from estate tax for 2018 will be $11,200,000 per person (or perhaps slightly less, as the new law also changes the method used to calculate inflation). The Hawai‘i estate tax law was previously amended to follow the federal estate tax law, so there is also an exemption of $11,200,000 from Hawai‘i estate tax. (In other words, if you pass away in 2018 with less than $11,200,000, and you didn’t already use up any of your exemption by making gifts during your lifetime, you will not owe any federal or Hawai‘i state estate tax.) A married couple each has $11,200,000, so the two of you together can leave up to $22,400,000 tax-free to your children or other loved ones. This “doubling” of the estate tax exemption will expire at the end of 2025. Unless Congress acts to make it permanent, the estate tax exemption will go back to the $5 million per person exemption (adjusted for inflation) in 2026.

How much can a person give away without paying a gift tax?

In 2018, you can give $15,000 to each person without having to report it to the Internal Revenue Service. You can give any amount to your husband or your wife who is a U.S. citizen without reporting it to the IRS, but only about $150,000 to a non-U.S. citizen spouse each year as an exclusion from the gift tax. If you give away more than $15,000 to any other person in one year, then the amount over $15,000 is a “taxable gift.” You are supposed to file a gift tax return to report the gift, but you can give up to $11,200,000 of taxable gifts using up some (or all) of your total lifetime exemption amount and still not pay any gift tax.

For the wealthy, this opens up a lot of opportunities to give away assets without having to pay a gift tax or to protect assets from future creditors. However, if you have more than $5,600,000, you might want to act now, before the larger gift tax exemption expires in 2025. Remember, if you give away assets, there will probably be a Medicaid penalty if you need nursing home care in the future. Do not give away assets (not even your home or $15,000 per person) without expert advice about the effects of gift tax laws, capital gains 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?

Together, a husband and wife can have $125,600 in non-exempt assets and still have Medicaid pay for the nursing home costs for one of them. (The amount is the same as last year.) This $125,600 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 and a burial plot for each family member; one wedding ring and one engagement ring; and up to $858,000 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 each have $2,000.

If you
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’TIS THE SEASON OF GIVING

’TIS THE SEASON OF GIVING

By

Ethan R. Okura and Carroll D. Dortch

 

From the American tradition of a big Thanksgiving feast to the various religious celebrations at this time of year, gifts and sharing with others are what make this holiday season so special. Unfortunately, many people are not aware that there can be unintended negative consequences for both the giver and the recipient of a gift when proper planning has not been done. There are three main things to think about when making gifts:

  • Taxes incurred by the giver and/or the recipient.
  • Nursing home Medicaid, Supplemental Security Income and similar resource-based government benefit program eligibility.
  • How the gift will affect the lifestyle of the giver and the recipient

 

Gift, Estate and Capital Gains Tax. When the gift tax was re-enacted in 1932, it wasn’t intended to raise a great deal of revenue for the government, but rather to protect against citizens transferring assets to others in a lower income tax bracket or giving away assets to avoid paying estate tax.

In 1932, you could give $5,000 to any number of people each year without owing any gift tax. This was called the annual exclusion. When adjusted for inflation to 2017 dollars, it would be equivalent to being able to give $82,700 to each person without incurring a gift tax. However, the annual exclusion was only increased to $10,000 in 1981and began to be adjusted for inflation in 1997. The annual exclusion amount is currently $14,000 to any number of people each year.

In addition, you may give away $5,490,000 in one lump sum or in many small gifts as an exemption to the gift tax during your life. This is in addition to the annual gift tax exclusion mentioned above. Any portion of the $5,490,000 that you do not use as an exemption on the gift tax during your lifetime will be applied as an exemption to any estate tax you may owe when you die. Therefore, if you don’t expect to ever own or give away a total of $5 million in assets by the time you pass away, you will never be able to use up all of your gift and estate tax exemption — even if you give away everything you own all at once. This is why, for most people, limiting themselves to gifts of $14,000 per year or less for the purposes of avoiding a gift tax is entirely unnecessary and possibly detrimental.

Capital gains tax is what you pay when you sell something (such as your home or stocks or anything else) for more than the price you paid for it. There can be some capital gains tax benefits to owning assets at the time of your death rather than giving them all away during your life. However, with proper legal advice, you can often retain those same benefits and give away assets during your lifetime. This is a much more complicated subject that deserves a column all its own in the future.

 

Nursing Home Medicaid and Supplemental Security Income. Even though you can give away $14,000 each year as an annual exclusion and up to $5,490,000 in addition to the annual exclusions without owing any gift tax, there can be other consequences for giving away assets. The most common problem is not being able to qualify for SSI benefits and long-term care Medicaid. Both are government programs based on need and requiring applicants to have limited assets. If you give away or sell assets for less than fair market value, you will not be eligible for SSI for up to 36 months after making the gift. For long-term care Medicaid, you will be ineligible for one month for every $8,500 worth of assets given away in the five years prior to applying for Medicaid. In other words, if you gave away assets worth a total of $85,000 in the five years before applying for Medicaid, you would have to wait 10 months after applying before you would be eligible to apply again.

 

Non-financial considerations. The final factor to consider when giving away assets is how it will affect your lifestyle and that of the gift’s recipient. If you might need the assets to maintain your own standard of living, you should be careful about giving them away. On the other side of the equation, who will be receiving the gift? If you are planning on giving hundreds of thousands of dollars to a 21-year-old young adult in college, you might prefer that he or she not spend it all on a new Ferrari or Lamborghini. Once you give it away, it is no longer yours and your ability to control what the recipient does with the asset will be limited.

However, if you give assets to an irrevocable trust for the benefit of your child (or anyone else), you can dictate the conditions under which your child can use the assets as the beneficiary of the trust. A properly drafted trust can also allow you to take advantage of the capital gains tax benefits of owning assets at death even if you give them away to the trust during your lifetime.

In conclusion, enjoy the spirit of the season, which may inspire you to give to others and help those less fortunate. However, in order to fully enjoy the blessings of giving without any negative consequences, make sure you get proper advice before making large gifts of assets.

 

 

© OKURA & ASSOCIATES, 2017

Honolulu Office (808) 593-8885

Hilo
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