2012 Estate Planning Update (January 2012)

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Sanford Okura
on January 20, 2012
in Estate Planning, Estate Taxes and Gift Taxes and Medicaid and Nursing Home Costs
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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)

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Sanford Okura
on April 1, 2011
in Estate Taxes and Gift Taxes
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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)

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Sanford Okura
on February 28, 2011
in Estate Taxes and Gift Taxes
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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.



The New Estate Tax Law (January 2011)

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michelle
on January 21, 2011
in Estate Taxes and Gift Taxes
. 0 Comments Tags: , .

Happy New Year, everyone!  We have some exciting new tax laws.  On December 17, 2010, President Obama signed into law the 2010 Tax Relief Act.  I will explain the most important changes in estate and gift taxes.

Temporary Law.  Important parts of the new law are only temporary.  If Congress does not further change the law, many of the benefits of the new law will disappear on January 1, 2013.

$5,000,000 Exemption.  The federal estate tax exemption is now $5,000,000 per person.  A U.S. resident can die with up to $5,000,000 in assets without paying any federal estate tax. For estates over $5,000,000 the tax rate is 35%.  The $5,000,000 exemption amount can increase with inflation after 2011.  However, on January 1, 2013, the exemption drops back down to $1,000,000 per person, with a tax rate of 55% for estates over $3,000,000, unless Congress again changes the law.

Portability of Exemption.  If a married person dies after December 31, 2010, the surviving spouse can use the part of the estate tax exemption that the first spouse did not use.  For example, suppose that husband dies in 2011 with $3,000,000.  His estate uses $3,000,000 of his $5,000,000 exemption, and pays no tax.  The surviving wife can claim his unused exemption of $2,000,000.  Now, she can die with up to $7,000,000 tax free.  To use this opportunity, an election must be made on the estate tax return when the first spouse dies.

Unified Gift and Estate Tax.  Under the new law, you can either die with up to $5,000,000 tax free, or give away up to $5,000,000 tax free.  If you give away $2,000,000 tax free while living, then you can die with another $3,000,000 tax free.  Before the law is changed again, you have a tremendous opportunity to make tax free gifts.  However, be sure to get expert advice before giving away property.  Some ways of giving property are better than others.

Generation Skipping Transfer (GST) Tax Exemption.  The GST tax is a tax in addition to the estate tax, which must be paid when you give away assets to grandchildren or others in a lower generation than grandchildren.  For gifts made after December 31, 2010, the new tax law provides a GST tax exemption of $5,000,000 and a tax of 35% on GST gifts over $5,000,000.  There are several advantages to making gifts to a GST Exempt Trust, rather than directly to children or grandchildren.  Be sure to discuss the advantages with an expert.

Death in 2010.  Before the new law, there was no estate tax for persons dying in 2010, and special “modified stepped up basis” rules were to apply in 2010 only. (You may read about “Stepped Up Basis” and “Stepped Up Basis in 2010” at www.okuralaw.com, under “estate planning articles.”) Under the new law, the property of a person who died in 2010 is subject to the tax on everything above $5,000,000, and gets a stepped up basis.  However, the estate can elect to have no estate tax and be subject to the modified stepped up basis rules.  If someone died in 2010 with less than $5,000,000, probably you would be better off not making the election, but do check with an expert.

Hawaii Estate Tax.  Before Christmas, I was contacted by an associate editor of Forbes Magazine.  She was working on an article about the new tax law and asked me whether the Hawaii Estate Tax will still have a $3,500,000 exemption, or increase to $5,000,000.  I told her that the Hawaii State Tax Department is saying that the exemption remains at $3,500,000, but the law is written in such a way, that it could be interpreted to mean that the Hawaii estate tax exemption is now $5,000,000, following the federal law.  If the Hawaii legislature does not rewrite the law more clearly, I predict that there will be a lawsuit when someone dies in Hawaii with more than $3,500,000.



The New Hawaii Estate Tax (June 2010)

Published
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Sanford Okura
on June 26, 2010
in Estate Taxes and Gift Taxes
. 9 Comments Tags: , , .

There is now a new Hawaii estate tax.  The bill proposing the tax (House Bill 2866) was vetoed by Governor Lingle on April 25, 2010.  The Hawaii legislature overrode the veto on April 29, 2010, and the bill became Act 74 on April 30, 2010.  It imposes a tax on the estates of persons dying after April 30, 2010.

Let me first explain the history of the Hawaii inheritance tax and the Hawaii estate tax.  An estate tax is a tax on the property of someone who has died.  The federal death tax is an estate tax. An inheritance tax is a tax on property that is inherited by each beneficiary or heir.  When I first became an attorney in 1976, there was a Hawaii inheritance tax.  I remember preparing Hawaii inheritance tax returns.  Then Hawaii adopted The Estate and Transfer Tax Reform Act of 1983.  When this law was adopted, the Hawaii death tax became an estate tax.  Hawaii’s estate tax was called a “pick-up tax.”  It allowed the State of Hawaii to pick up (or collect) 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.  Since 2005, there has been no Hawaii death tax, until now.

The new Hawaii estate tax law is poorly written.  It would be difficult for someone to understand the new law without doing some tax research and without knowing the history of the federal estate tax and the Hawaii estate tax.  When you first read the new law, it sounds like the tax only affects nonresidents who are not citizens of the United States.  After researching the federal and state tax laws referred to, you realize that the new law affects Hawaii residents and citizens as well.

It appears that under the new law, there will be no Hawaii estate tax to pay unless you die with a taxable estate of more than $3,600,000.  Although the new law allows a $3,500,000 tax free amount, when you actually calculate the tax, another $100,000 is tax free, for a total of $3,600,000.   For the first $50,000 over $3,600,000, the tax rate is only .8%.  For those who die with a taxable estate of more than $10,100,000 the tax rate goes as high as 16%.

If a married person with an A-B trust with more than $3,600,000 dies in 2010, since there is no federal estate tax this year, the entire estate would go into the B trust, and nothing would go into the A trust (the marital trust). Everything going into the B trust in excess of $3,600,000 would be subject to the new Hawaii estate tax.  Some or all of that tax could be avoided by changing the trust to cause some assets to go into the A trust.  In 2011 or later years, under current law only $1,000,000 will be exempt from the federal estate tax but $3,600,000 will be exempt from the Hawaii estate tax.  Depending on the size of the estate, there may be tax savings by arranging the estate plan so that some tax is paid when the first spouse dies, instead of deferring all taxes until the second spouse dies.   Anyone with assets large enough to be taxed should have their estate plan reviewed to see if any changes are warranted as a result of the new Hawaii estate tax or the reduction in 2011 of the federal tax free amount to only $1,000,000.



An Unusual Year for Tax Law (February 2010)

Published
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Sanford Okura
on February 24, 2010
in Estate Taxes and Gift Taxes
. 1 Comment Tags: , , , .

2010 – AN UNUSUAL YEAR FOR TAX LAW

There is no federal estate tax this year.  Since the State of Hawaii has no inheritance tax, Hawaii residents can die this year with any amount of assets and pay no death taxes at all.  This is only for the year 2010.  For someone dying in 2011 or later years, any assets not inherited by a spouse or a charitable organization will be taxed, starting at a tax rate of 41% from the first dollar over 1 million, and going up as high as 55% for amounts over 3 million dollars.

The strange law this year and next year is a result of the 2001 tax act.  The 2001 tax act was supposed to get rid of the estate tax.  The 2001 tax act provided that the amount exempt from estate taxes would be $1,000,000 in 2002 and 2003, $1,500,000 in 2004 and 2005, $2,000,000 in 2006, 2007 and 2008, $3,500,000 in 2009, with no estate tax at all in 2010.  However, the bill that passed Congress contained a “sunset clause.”  The sunset clause provided that unless Congress in the future voted to extend the law, this new tax law would expire after December 31, 2010.  Like Cinderella’s beautiful carriage turning back into a pumpkin, just after midnight on December 31, 2010, the tax law will go back to what it was in 2001, which was that only 1 million dollars is exempt from the estate tax.  Therefore, there is no estate tax, but only for this year.  Remember, however, that Congress and the President can change the law again at any time.

Another important change is in the law regarding the stepped up basis.  (See my October 2009 Estate Planning Insights column about the stepped up basis.  You can find a copy in my blog at www.okuralaw.com.)  The usual stepped up basis rules do not apply in 2010, but will again apply starting January 1, 2011.  The 2010 basis rules are called the “Modified Carry-over Basis” rules.  If a person dies in 2010, the tax basis in the property will be the lower of the basis before the person died, or the fair market value at date of death.  However, the executor can increase the basis of assets owned at death up to the lesser of fair market value or 1.3 million dollars, plus up to the lesser of fair market value or 3 million dollars for property passing to a surviving spouse.  To qualify for the increase in basis, the property has to be in the name of the person who dies, or in her revocable living trust.  Although some experts differ on this issue, it is my opinion that property in which a person dies in 2010 with a life estate will not get a step up in basis.

Another important tax change in 2010 is with Roth IRA conversions.  Using a Roth IRA is a wonderful way to invest.  Although you do not get a tax deduction when you put money into the Roth IRA, it grows tax free, and you can take it out tax free.  You do not have to start taking distributions at age 70 ½.  You can leave part or all of it to children or grandchildren, who can take it out over their entire life, totally tax free!  The law has not allowed Roth IRAs for single persons earning more than $110,000 a year or married couples earning more than $160,000 a year.  However, in 2010, regardless of large income, a person may be able to convert a traditional IRA, 401(k) plan, profit sharing plan, 403(b) plan, 457 plan or even an inherited 401(k) into a Roth IRA.  Income tax must be paid on the conversion, and it could be a huge tax, but thereafter the Roth IRA and its profits are tax free forever.  It is possible to set up a Roth IRA to invest in real estate, private corporations and LLC’s, etc. and there are techniques for legally reducing the taxes payable upon conversion.

© OKURA & ASSOCIATES, 2010



Proposed New Laws

Published
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Sanford Okura
on April 29, 2009
in Estate Taxes and Gift Taxes
. 4 Comments Tags: , , , .

PROPOSED NEW LAWS

There are some proposed new rules and laws which would affect estate planning.  First, let’s review the current estate tax law.  The estate tax is a federal tax.  At this time there is no Hawaii estate tax or inheritance tax.  As a result of the 2001 tax act, the current estate tax law is very strange.  A person can die in 2009 with up to $3,500,000 of assets without any estate tax.  For amounts over $3,500,000, the estate tax rate is 45%.  In 2010 there is no estate tax at all.  Bill Gates could die in 2010 with 50 billion dollars of assets and pay no death tax!  In 2011 a person can die with only $1,000,000 tax free.  For amounts over $1,000,000, the estate tax rate starts at 41% and goes up to 55% for amounts over $3,000,000.

This strange law was created by Congress in 2001.  At that time, a person could die with $1,000,000 of assets tax free.  The 2001 tax act pretended to get rid of the estate tax.  It gradually increased the amount of assets with which a person could die tax free.  The tax free amount was increased to $1,500,000 for persons dying in 2004 and 2005, $2,000,000 for 2006 through 2008, $3,500,000 for 2009, and then in 2010, there would be no estate tax at all.  However, the bill that passed Congress had a “sunset clause.”  It provided that unless Congress acted to extend the law, this new law would disappear at midnight on December 31, 2010, and on January 1, 2011, we would return to the law which was in effect in 2001 before the 2001 tax act was passed.  Some of the nation’s top estate and gift tax scholars believe that Congress never did intend to get rid of the estate tax.  Congress just pretended they would get rid of the tax, to win political points.

At the end of March 2009, Senate Finance Committee Chairman Max Baucus (D- Montana) made an important announcement.  He announced proposed legislation to be called “The Taxpayer Certainty and Relief Act of 2009.”  The word “certainty” in the title is to reassure the public that we will finally know for certain what the estate tax law is going to be.  The major proposal of the bill is to make permanent the 2009 estate tax, gift tax and generation skipping tax laws.  This means that the bill proposes to keep $3,500,000 as the amount exempt from estate taxes in 2010, 2011 and beyond.  The bill also proposes to index the amount of exemption for inflation.  This means that the amount exempt from estate taxes would increase as the cost of living goes up.  The bill proposes other changes, both in estate tax laws and in income tax laws.  After the details of the proposal are available, I will give you a more complete report on this important bill.  I believe there is a very high probability that Congress will pass changes to the estate tax laws this year.  The reason I believe this is that I don’t think they would want wealthy people to die in 2010 without being taxed.

The Deficit Reduction Act of 2005 was the most sweeping change in 13 years of laws relating to Medicaid for nursing homes.  It was signed into law by President Bush on February 8, 2006.  The State of Hawaii is so slow in implementing it that the new law is still not being followed in Hawaii.  On March 23, 2009, the Department of Human Services finally held a public hearing on proposed changes to the Hawaii Administrative Rules based on the Deficit Reduction Act.  However, when I read the proposed rules, I did not find any rules showing the most important changes made by the federal law.  Therefore, until further notice, we can still get nursing home residents qualified for Medicaid under the less strict older law, which is still being followed in Hawaii.

 

© OKURA & ASSOCIATES, 2009

 



© Okura & Associates, 2008