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Estate Taxes and Gift Taxes | Okura & Associates - Hawaii Estate Planning Attorneys

Tax Filings, Payments & Other Considerations (April 2014)

TAX FILINGS, PAYMENTS, AND

OTHER CONSIDERATIONS

 By

Ethan R. Okura

“’Tis impossible to be sure of anything but Death and Taxes.”

- Christopher Bullock (Cobbler of Preston)

Last month I addressed the serious topic of Death and the disposition of your remains.  On an only slightly brighter note, this month’s article is focused on the main thing on everyone’s mind at this time of year:  Taxes.

Most of us have heard a variation of the quote above, “The only two certainties in life are death and taxes,” usually attributed to Mark Twain.  And almost three hundred years after Bullock first wrote the phrase, it is our experience that the statement holds true!

Although many of us look forward to filing our taxes and getting that refund check from Uncle Sam, there are a few among us who, for some reason or another, haven’t had enough taxes withheld or haven’t paid enough in estimated tax payments and will actually OWE a hefty amount on April 15th.  If this applies to you, don’t panic!  Even if you can’t make the tax payments you owe, don’t let that stop you from filing your return on time.  There are some penalties for not paying on time, but there’s a much worse penalty if you don’t file your return on time also.  Here are the main penalties:

Failure to File Penalty – If you don’t file your return on time (or request an automatic 6-month extension to file), the penalty is 5% per month (or any portion of a month) on the amount your return would show that you owe. This penalty caps out at a maximum of 25% after 5 months.

Failure to Pay Penalty – Even if you do file your return on time, if you don’t pay the amounts owed by April 15th (or the following Monday if it falls on a weekend), there is a penalty of 1/2% per month (or any portion of a month) on the amount that your tax return would show that you owe.  As you can see, even if you can’t pay it on time, it’s better to file and owe 1/2% per month than to NOT file at all and owe 5% each month. If you fail to file and fail to pay, the fail to file penalty drops to 4.5%, so there’s still only a 5% per month combined penalty for up to 5 months (25% maximum).  However, the 1/2% penalty per month can continue on for another 45 more months after that if you don’t pay, which means your maximum penalty could be 47.5% of what you owed in taxes.  And what’s worse, these are just the penalties—you will also owe interest on the unpaid tax amount up until the time it’s actually paid.

Missed Estimated Tax Payments Penalty – The final penalty to be concerned about comes into play if you were obligated to make estimated tax payments throughout the year, and did not do so on time.  The penalty here is 3% more than the federal short term interest rate from the time it was owed until the time you pay or April 15th, whichever comes first.

What should you do if you can’t pay?  There are a few options.  You can request an Undue Hardship Extension using IRS Form 1127 submitted with a statement of your assets and liabilities together with an itemized list of receipts and disbursements for the 3 months prior to the tax due date.  You have to show that paying taxes would be a real hardship and not merely an inconvenience, and you also have to show that you can’t borrow the money.  Another option, if you can, is to borrow the money. You can borrow from friends and family, or pay with a credit card.  If you have a home equity line of credit, you can draw from there to pay taxes and the interest paid on the home equity line is tax deductible for the next year.  Otherwise, if you just borrow money as a personal loan to pay taxes, the interest owed is not tax deductible.  Finally, you can request an Installment Agreement using IRS Form 9465.  For a $105 one-time fee, the Installment Agreement lets you make payments over time and is much easier to qualify for than the Undue Hardship Extension.  You won’t have to submit financial statements if you owe less than $50,000 in taxes.  If the IRS does grant you an Installment Agreement, you will still owe interest on the late payments, but the Failure to Pay Penalty will be reduced to 1/4% per month.

Once you’ve got your taxes filed and paid (or a payment plan worked out), you should call and make an appointment with your estate planning attorney to take a look at and maybe update your estate plan.  Estate planning is a process—not a one-time event.   A lot of things can change in a year.  The laws change, your desires change, your family situation changes (children get married or divorced, family members pass away), and you dispose of and acquire assets.  It’s a good idea to at least update your power of attorney frequently and double check how all of your accounts are titled and beneficiaries are designated.  Also, depending on your situation, there may be some suggestions that your Estate Planner or Accountant will have that can help to reduce your taxes for the upcoming year.  See you in the office!

 

© OKURA & ASSOCIATES, 2014

Honolulu Office  (808) 593-8885

Hilo Office          (808) 935-3344

 




2014 Estate Planning Update (February 2014)

2014 ESTATE PLANNING UPDATE

By

 Ethan R. Okura

 

Here is a 2014 update on important numbers used in Estate Planning and Medicaid Planning in Hawaii.

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

A little over one year ago, Congress passed a law  making the exemption from estate taxes $5,000,000 (adjusted for inflation) without a built in expiration date. Taking into account inflation, the actual amount exempt from estate tax for 2014 is $5,340,000. The Hawaii Estate Tax law was amended to follow the Federal Estate Tax law so there is also a $5,340,000 exemption from Hawaii estate tax. (In other words, if you pass away in 2014 with less than $5,340,000, and you didn’t already use up any of your exemption by making gifts during your life, you will not owe any Federal or Hawaii State Estate Tax ).

How much can a person give away without paying a gift tax?  You can give $14,000 each year to each person without having to report it to the IRS.  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 $14,000 to any person in one year, then the amount over $14,000 is a “taxable gift.”  You have to file a gift tax return to report the gift, but for 2014, you can give up to $5,340,000 of taxable gifts in your lifetime without paying a gift tax.  For the wealthy, this opens up a lot of opportunities to give assets without tax or to protect assets from creditors.  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?  A husband and wife together can have $119,240 in assets and still have Medicaid pay for the nursing home costs for one of them. (The amount was $117,920 last year.) This $119,240 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 $814,000 of equity in a home. (The equity limit was $802,000 last year.)

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; for a married couple, they can each have $2,000.

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.    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 even before 5 years has passed.

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 $2,931 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 $2,931.  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 in Hawaii if a person dies with real estate of any value, or other assets worth over $100,000, which are not in a revocable living trust, not in joint names with right of survivorship, and do not name a beneficiary.

© OKURA & ASSOCIATES, 2014




Tax Identification Numbers (September 2013)

TAX IDENTIFICATION NUMBERS

By

Ethan R. Okura

Back in June, I wrote an article on how Obamacare affects the income taxes that trusts pay.  It’s a very complicated subject (taxes always seem to be, don’t they?) and my quick summary of how it works may have left you with more questions about how trusts are taxed than you had before you read the article.  Today I’m going to explain how Tax Identification Numbers work, both for Trusts and for other business entities.

Generally, your personal Tax Identification Number (TIN) is the same as your Social Security Number (SSN). That’s the number you use to file your personal income taxes every year.  Individuals who work or invest in the US, and/or are required to report or file taxes in the US, but who are not eligible to receive a Social Security Number, need to apply for an Individual Taxpayer Identification Number (ITIN).

Another type of Tax Identification Number, intended exclusively for businesses, is an Employer Identification Number (EIN).  All Corporations and Partnerships are required to have an EIN.  When you own a business as a Sole Proprietor, you may elect to use your Social Security Number to report all the income and expenses of your business on Schedule C of your personal Income tax Return, but if you have any employees, you must obtain an EIN.  Some Sole Proprietors choose to use an EIN instead of their SSN—even if they don’t have employees—to help reduce the possibility of identity theft or because their bank requires an EIN in order to open a business checking account.

An LLC is a very flexible type of business entity.  The owner(s) of an LLC can file IRS Form 8832 to elect to have the LLC treated as a C-Corporation or an S-Corporation for tax purposes, in which case it would need an EIN.  If no such election is made, an LLC with a single owner is disregarded for Income tax purposes, and the owner reports the income and expenses of the LLC on his own tax return the same way a Sole Proprietor would, so no EIN is needed.  When an LLC has two or more owners and no Form 8832 election is made, then it’s treated as a partnership for Income tax purposes and the LLC must obtain an EIN.

Well, what about Trusts?   In general, an Irrevocable Trust (one that cannot be amended or cancelled) requires the Trustee to obtain a separate Tax Identification Number (in the form of an EIN).  However, if it qualifies as a “Grantor Trust”, then the Trustee may use the Grantor’s Social Security Number instead of obtaining an EIN.  The Grantor, sometimes called the Settlor or Trustor, is the creator of the trust who put assets into it.  The Internal Revenue Code §§671-679 define when a trust is to be treated as a “Grantor Trust” for income tax purposes, and it all depends on the terms of the trust.  All Revocable Trusts are Grantor Trusts.  Some Irrevocable Trusts can also be Grantor Trusts.  If it is a Grantor Trust, you may use the Grantor’s SSN or you may choose to use an EIN for the Trust’s tax reporting requirements.

It gets a little more complicated when you have multiple Grantors for one trust, but Treasury Regulation §1.671-4 clarifies:  When you have a husband and wife who are both Grantors of a Grantor Trust (revocable or irrevocable), they may pick either the husband’s or the wife’s SSN to use for reporting trust income as long as they are filing their personal income taxes jointly.  If the Grantors are a married couple who are filing separately, or if the Grantors are not a married couple, then the Trust must obtain its own EIN.

Tax rules can be very complicated so be sure to get competent advice from a professional who is experienced in this area of law.  The Law Offices of Okura & Associates can help you with obtaining an EIN for your trust or business if you need one.

 

© OKURA & ASSOCIATES, 2013




How Does Income Tax Work With My Trust? (June 2013)

HOW DOES INCOME TAX WORK WITH MY TRUST?

By

 Ethan R. Okura

Last month after writing my article on Medicaid planning techniques, we received a message from a concerned client who is worried about higher income tax rates, the new 3.8% Medicare (sometimes called Obamacare) Surtax, and in light of these developments, whether a trust is still the right solution for his family’s needs. Perhaps he read a Forbes magazine article with an alarming title “Tax Hikes Hit Trusts Hard, Beneficiaries Pull Money Out.”  In my January article I described the Estate and Gift Tax changes brought about by the American Taxpayer Relief Act of 2012 (ATRA).  Let me now touch on some of the income tax changes, how trusts are taxed, and why a trust is still a better choice for most people.

Tax Changes

1) New Income Tax Rates – Back in July of 2001, the Bush tax cuts lowered most of our income tax rates. The highest federal income tax bracket for the past decade has been taxed at a rate of 35%. After ATRA, there is a new higher tax bracket at a 39.6% rate for individuals earning $400,000+ per year or married couples earning $450,000+ per year.

2) Social Security Tax Hike – There is a 2% increase in the employee’s portion of Social Security payroll tax totaling 6.2% now. This comes out of your paycheck before you see it.

3) Capital Gains Tax Increase – Whenever you sell property at a profit (real estate, cars, stocks, mutual funds, personal property), the profit is called a capital gain, and there is a tax on that gain which is considered income. The maximum federal capital gains tax rate is being increased from 15% to 20% for individuals with taxable income over $400,000 and married couples with taxable income over $450,000.

4) Obamacare/Medicare Tax – There are two parts to this tax. The first involves an additional 0.9% payroll tax (in addition to the 2.9% that you and your employer already pay) on earned income over $200,000 for individuals and over $250,000 for married couples filing jointly. The second part is a 3.8% surtax on net investment income to the extent that it exceeds modified adjusted gross income of $250,000 for individuals or $250,000 for couples. This second part is a little tricky to understand, but the way to calculate it is to determine how much of your income is net investment income (i.e., not earned income), then subtract $200,000 (or $250,000 if married filing jointly) from your modified adjusted gross income. Compare the result with your net investment income. You will owe the 3.8% surtax on the lesser of the two numbers. If you have over $200,000 in earned income and some investment income, you will end up paying both the 0.9% extra payroll tax and the 3.8% surtax on investment income.

5) How The Changes Apply to Trusts – The highest income tax rate of 39.6% applies to a trust that earns and retains income of only $11,950 for the tax year. However, this is not a new, drastic change. In 2012, the highest income tax rate for trusts was 35% for trusts that earned and retained $11,650 for the tax year. The higher 20% Capital Gains Tax rate applies to trusts earning and retaining more than $11,950 in income. The 3.8% Medicare Surtax applies to trusts with undistributed net investment income in excess of the dollar amount that starts the highest trust tax bracket ($11,950 for 2013).

How Trusts Are Taxed

For US Federal Income Tax purposes, your trust will likely be taxed as either a Grantor Trust or a Complex Trust. Every Revocable Living Trust is a Grantor Trust. A Grantor Trust generally does not have to file its own tax returns as all of the income from the trust can be claimed on the Grantor’s (trust creator’s) tax return.  Most standard Irrevocable Trusts are complex Trusts. A complex trust can pay taxes on its own income; or, if the trustee can distribute any taxable income to the trust beneficiaries, the trust can issue a K-1 form to beneficiaries so that the beneficiaries can include the income on their own tax returns rather than having the trust pay the income taxes. However, we can also create an Irrevocable Trust as a Grantor Trust where the income of the trust is taxed to the grantor or creator of the trust. Most of our clients with irrevocable trusts have grantor trust status.

What To Do About Trusts Given New Tax Laws

If you have a Grantor Trust (Revocable or Irrevocable), then the trust income tax thresholds do not apply. The grantor’s own income tax brackets will be relevant when determining taxes owed on trust income. For a Non-Grantor Irrevocable Trust (complex trust), if the trustee distributes all trust income to the beneficiaries, the beneficiaries will claim the income on their own tax returns and their individual tax rates apply instead of the higher tax rate at low income amounts for trusts. So although these new laws mean higher taxes for high income earners, there’s no need to be concerned just because you have a trust.

© OKURA & ASSOCIATES, 2013




2013 Estate Planning Update (February 2013)

2013 ESTATE PLANNING UPDATE

By

Ethan R. Okura

            Here is a 2013 update on important numbers used in Estate Planning and Medicaid Planning in Hawaii.

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

As I mentioned in last month’s article, $5,000,000 (adjusted for inflation) is estate tax free permanently starting this year. The IRS Revenue Procedure 2013-15 clarified that taking into account inflation, the actual amount exempt from estate tax for 2013 is $5,250,000. The Hawaii Estate Tax law was amended to follow the Federal Estate Tax law so there is also a $5,250,000 exemption from Hawaii estate tax. (In other words, if you pass away in 2013 with less than $5,250,000, you will not owe any Federal or Hawaii State Estate Tax ).

How much can a person give away without paying a gift tax?  You can give $14,000 each year to each person without having to report it to the IRS.  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 $14,000 to any person in one year, then the amount over $14,000 is a “taxable gift.”  You have to file a gift tax return to report the gift, but for 2013, you can give up to $5,250,000 of taxable gifts in your lifetime without paying a gift tax.  For the wealthy, this opens up a lot of opportunities to give assets without tax or to protect assets from creditors.  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?  A husband and wife together can have $117,920 in assets and still have Medicaid pay for the nursing home costs for one of them. (The amount was $111,640 last year.) This $117,920 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 $802,000 of equity in a home. (The equity limit was $786,000 last year.)

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.    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 $2,898 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 $2,898.  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 in Hawaii if a person dies with real estate of any value, or other assets worth over $100,000, which are not in a revocable living trust, not in joint names with right of survivorship, and do not name a beneficiary.

© OKURA & ASSOCIATES, 2013




New Law: Saved from the Fiscal Cliff? (January 2013)

NEW LAW: SAVED FROM THE FISCAL CLIFF?

By

Ethan R. Okura

As you may know, President Obama cut short his vacation in Hawaii to return to Washington D.C. and deal with the problem of the fiscal cliff. For those of you who weren’t aware, the fiscal cliff refers to a sharp decline in the budget deficit based on increased taxes and reduced federal government spending that was projected to start in January 2013. This cliff was expected to result in a mild economic recession and an increase in unemployment.

The American Taxpayer Relief Act of 2012 was passed by Congress on January 1, 2013 and signed into law on January 2, 2013 by President Obama. This new law is held out to be a temporary solution to the problem of the fiscal cliff.

First a little background on what elements of the fiscal cliff relate to estate planning. This story goes back at least as far as July 2001, when President Bush signed the Economic Growth and Tax Relief Reconciliation Act (“EGTRRA”) of 2001. In 2003, Bush signed the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”) . One notable aspect of these Bush tax cuts was the elimination of the estate tax (also called the “death tax”). Starting in 2005, the estate tax exemption was raised and kept on increasing until 2010, when there was no estate tax. However, EGTRRA contained a sunset clause, which means the law was to expire on December 31, 2010, and would go back to the way it was before July 2001.

In late December of 2010, just before the sunset clause was to take effect, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This was designed to be a temporary solution as it extended some of the Bush tax cuts for 2 years—with its own sunset provisions at the end of 2012. However, instead of eliminating the estate tax completely, it provided for a $5,000,000 exemption from estate and gift taxes for 2011, a $5,120,000 exemption for 2012, and it delayed the sunset provision for 2 years. It also introduced portability of the estate tax exemption between spouses.

If Congress and President Obama had not passed this new law last week, the estate and gift tax exemption would have automatically reverted to just $1,000,000 per person, with the estate tax rate for most estates at 55%.

Changes brought by the American Taxpayer Relief Act of 2012

With this new law passed by President Obama last week, Congress has reached a compromise which permanently locks in the $5,000,000 exemption for estate and gift tax, as adjusted for inflation (until they decide to change it again). The top gift and estate tax rate increased from 35% to 40%.

The new law also made permanent the portability of unused estate tax exemption from a deceased spouse to the survivor as long as an estate tax return is filed for the deceased spouse and an election is made to carry over the unused exemption to the surviving spouse. The filing of the estate tax return is required to utilize the portability even if no estate tax is owed for the death of the first spouse.

Another change in 2013 is the increase in the amount of the annual gift tax exclusion from $13,000 to $14,000 per recipient, which can be gifted each year without using any of the $5,000,000 lifetime exemption.

Finally, those who are over age 70½ may make charitable contributions from their IRAs of up to $100,000 as a “charitable rollover” and not have to claim the distribution from the IRA on their income at all. This is advantageous for those who donate large amounts to charity and might otherwise be phased out on how much they can deduct from their income for charitable contributions.

Although the new law is supposedly a “permanent” change in the law because it overcomes the sunset provisions of previous laws, these laws could always be changed at any time if Congress decides that it needs to actually address the budgetary problems faced by the Federal Government at some point in the future.

Therefore, for those of you who have an estate larger than $1,000,000 and are concerned about estate taxes, but didn’t get around to transferring assets in 2012, we have a little more time to implement a variety of gifting strategies.

For those of you with estates smaller than $1,000,000, you may still want to consider taking advantage of the opportunity to gift some of your assets (such as your home) if you are concerned about the threat of nursing home costs.

As always, please consult with a qualified attorney to determine whether any of these suggestions are appropriate for your situation.




HAWAII ESTATE AND GENERATION SKIPPING TRANSFER TAXES (July 2012)

HAWAII ESTATE AND GENERATION SKIPPING TRANSFER TAXES

On July 5, 2012, Governor Abercrombie finally signed into law the Estate and Generation-Skipping Tax Reform Act, which is Act 220. Parts of this law were badly needed to clean up the poorly written Hawaii Estate Tax law which became effective in 2010.

The law applies to deaths and taxable transfers occurring after January 25, 2012. It provides for both an estate tax and a generation skipping tax. The intent of the law is to have the Hawaii law follow the federal law as closely as possible, with a few exceptions.

The applicable exclusion amount (the amount exempt from estate tax) is the same as the federal applicable exclusion amount, without reduction for taxable gifts. The federal applicable exclusion amount this year is $5,120,000, and drops to $1,000,000 in 2013. The Hawaii estate tax rate starts at 10% for a net taxable estate of $1,000,000 or less, and increases for larger estates. It goes up to $600,000 plus 15.7% on the excess of a net taxable estate over $5,000,000.

The Hawaii law also includes a generation skipping transfer tax. Generally, the generation skipping transfer tax applies when a transfer is made to a person two or more generations below the donor.  This tax is in addition to the estate tax, on transferred property located in the State of Hawaii and transferred property from a resident trust. In 2013, the federal generation skipping transfer tax is scheduled to be a flat 55% of the value of the property transferred in excess of the exemption amount. Because of the very high rate of taxation, we almost always plan to avoid the generation skipping transfer tax. With proper estate planning, there should be no generation skipping transfer tax to worry about either on the federal or state level.

Let me review the history of the Hawaii Estate Tax. Back in 1983, Hawaii adopted The Estate and Transfer Tax Reform Act of 1983.  When this law was adopted, the Hawaii death tax, which used to be an “inheritance tax” payable by the beneficiaries, became an estate tax, payable by the estate of the person who died.  Hawaii’s estate tax was called a “pick-up tax.”  It allowed the State of Hawaii to pick up for itself part of the estate tax which the federal government could collect.  The amount that Hawaii could collect was the maximum amount that the federal government allowed as a credit for state death taxes against the federal estate tax.  Later, the federal government passed the Economic Growth and Tax Reconciliation Act of 2001.    This tax act phased out the state death tax credit at the rate of 25% a year starting in 2002.  This meant that the amount of the federal death tax which Hawaii got to keep was reduced each year, until it became zero.  From 2005, there was no Hawaii death tax, until 2010. On April 25, 2012, then Governor Lingle wisely vetoed the proposed Hawaii Estate Tax law. The law was so poorly written that it was ambiguous. Nevertheless, the Hawaii legislature overrode Governor Lingle’s veto, and the law became effective on April 30, 2010. It imposed a Hawaii estate tax on the estates of persons dying after April 30, 2010.

On December 17, 2010, President Obama signed into law the 2010 Tax Relief Act. This new federal law provided that $5,000,000 would be exempt from federal estate taxes. The Hawaii Tax Department was telling people that even though $5,000,000 is exempt under the federal law, only $3,500,000 is exempt under the Hawaii Estate Tax law.  However, as I carefully studied the Hawaii law, I concluded that the law was ambiguous, and that it was unclear whether the exemption from the Hawaii estate tax should be $3,500,000 or $5,000,000.

The Hawaii legislature realized that the Hawaii Estate Tax law needed to be cleaned up, and this new law is the result.

© OKURA & ASSOCIATES, 2012




2012 Estate Planning Update (January 2012)

Here is a 2012 update on important numbers used in Estate Planning and Medicaid Planning in Hawaii.

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

Under a temporary federal law, $5,000,000 is tax free this year. From January 1, 2013, only $1,000,000 will be tax free.  There is a bill in Congress, introduced on November 17, 2011, called the “Sensible Estate Tax Act of 2011,” which proposes to reduce the exemption to $1,000,000 immediately. You can track this bill at http://www.govtrack.us/congress/bill.xpd?bill=h112-3467. There is also a Hawaii Estate Tax.  The State Tax Department is saying that $3,500,000 is tax-free.  The law is ambiguous.  It could be argued that the state exemption is meant to be the same as the federal exemption – $5,000,000.

How much can a person give away without paying a gift tax? You can give $13,000 each year to each person without having to report it to the IRS.  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 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 for 2012, you can give up to $5,000,000 of taxable gifts in your lifetime without paying a gift tax.  This amount goes down to $1,000,000 in 2013. For the wealthy, now is the time to give.  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? A husband and wife together can have $115,640 in assets and still have Medicaid pay for the nursing home costs for one of them. (The amount was $111,560 last year.) This $115,640 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 $786,000 of equity in a home. (The equity limit was $750,000 last year.)

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.    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 $2,841 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 $2,841.  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 in Hawaii if a person dies with real estate of any value, or other assets worth over $100,000, which are not in a revocable living trust, not in joint names with right of survivorship, and do not name a beneficiary.

© OKURA & ASSOCIATES, 2012




Hawaii State Death Tax Calculation Chart (April 2011)

Hawaii State Death Tax Calculation Chart

 

Step 1: Determine Taxable Estate (from federal form 706, Part 2, Line 3) (However, use $3.5M as exemption)*

Step 2: Determine Adjusted Taxable Estate (Subtract $60,000 from Taxable Estate in Step 1)

Step 3: Find Adjusted Taxable Estate on Chart Below and calculate tentative tax

(A) Adjusted Taxable estate, equal to or more than… (B) and, Adjusted Taxable estate, less than… (C) Base Tax on amount in column (A) (D) Rate of Tax on excess over amount in column (A) (%)
$ 0 $ 40,000 $ 0 0.0
$ 40,000 $ 90,000 $ 0 0.8
$ 90,000 $ 140,000 $ 400 1.6
$ 140,000 $ 240,000 $ 1,200 2.4
$ 240,000 $ 440,000 $ 3,600 3.2
$ 440,000 $ 640,000 $ 10,000 4.0
$ 640,000 $ 840,000 $ 18,000 4.8
$ 840,000 $ 1,040,000 $ 27,600 5.6
$ 1,040,000 $ 1,540,000 $ 38,800 6.4
$ 1,540,000 $ 2,040,000 $ 70,800 7.2
$ 2,040,000 $ 2,540,000 $ 106,800 8.0
$ 2,540,000 $ 3,040,000 $ 146,800 8.8
$ 3,040,000 $ 3,540,000 $ 190,800 9.6
$ 3,540,000 $ 4,040,000 $ 238,800 10.4
$ 4,040,000 $ 5,040,000 $ 290,800 11.2
$ 5,040,000 $ 6,040,000 $ 402,800 12.0
$ 6,040,000 $ 7,040,000 $ 522,800 12.8
$ 7,040,000 $ 8,040,000 $ 650,800 13.6
$ 8,040,000 $ 9,040,000 $ 786,800 14.4
$ 9,040,000 $ 10,040,000 $ 930,800 15.2
$ 10,040,000 . . . . . . . . $ 1,082,800 16.0

2010 Okura & Associates

* The State of Hawaii says the exemption is $3.5 million, but the law is ambiguous and it may be arguable that the state exemption should be $5 million during the period of time in which  the federal estate tax exemption (“basic exclusion amount”) is $5 million.




Take Advantage of the New Gift Tax Law (February 2011)

The new tax law gives us a wonderful opportunity to protect assets from nursing home costs and also from taxes.  It makes temporary changes to the federal tax laws.  It allows you to give away during your lifetime up to $5 million of assets without any gift tax.  From January 1, 2013, there will be an estate tax if you die with more than $1 million, and there will be a gift tax if you give away more than $1 million.  The tax rate starts at 41% from the first dollar above $1 million, and goes up to 55% for amounts above $3 million.  If you are ready to give, now is the time to give.

FOR THOSE WHO DON’T THINK THEY ARE WEALTHY.  If you don’t feel you are rich, there can still be a great advantage to giving: to protect your assets from nursing home costs.  The easiest asset to give is your home.  You can give your house and lot (or condominium) to your children or other loved ones, but keep the right to live there.  You can still live there, so your life doesn’t change at all.  The change is only on paper.  Yet, after 5 years pass by, that home is safe from nursing home costs.  Even if you have to enter a nursing home and get Medicaid to pay the nursing home bills, the home is safe.  To learn more about this, you can read the articles I wrote for the Hawaii Herald in the past called “Protect Your Home From Medicaid Liens (Parts 1, 2, and 3).”  Copies can be found in our website at www.okuralaw.com.   If you have a home worth more than $1 million, now is the time to take advantage of the new tax law by giving it away tax free, yet keeping the right to live there for the rest of your life.

FOR THOSE WITH MORE THAN $1 MILLION OF ASSETS.  If you have more than $1 million in assets, you may want to consider giving now.  There are advantages in giving while you are living rather than after you die.  First of all, your loved ones may need the financial help now, rather than later.  Also, there can be a tax advantage to giving now.  After you give away an asset, any growth in the value of the asset will be outside of your estate.  Let me explain.  Suppose you own a property worth $3 million.  You hold on to it, and die years later when it is worth $5 million.  Suppose that at that time the law allows you to die with $3.5 million tax free.  There will be a tax on $1.5 million.  If the tax rate does not change, that tax would be $825,000.  By giving the property now with no tax, you save $825,000.

Even if you give less than $5 million, it may be a good idea to take advantage of valuation discounts.  A “valuation discount” is an artificial but legal reduction in the value of property.  For example, suppose you have real estate worth $3 million.  You transfer it to a limited partnership.  You can keep control of the partnership by owning only 1% of the shares as the general partner.  You give away to your children 99% of the partnership as limited partnership shares.  Because the limited partnership shares have no control and are hard to sell, a business appraiser could determine that there is a 40% discount.  You gave away $3 million of property, but report to the IRS that you only gave away $1.8 million.  You might want to do this even if you will have no gift tax, because using up less of your exemption may help you avoid a future estate tax.

Be sure to seek the advice of an estate planning specialist before you give away assets.  There are many angles to consider.