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

People often ask me for advice about reverse mortgages.  They hear that with a reverse mortgage the bank pays you instead of your paying the bank, and that sounds good to them.  Here is the advice I give them:  if you want your children or other loved ones to inherit your home, do not get a reverse mortgage.  If you don’t mind having your home go to the bank rather than to your children when you die, then it might be ok to get a reverse mortgage.

The name “reverse mortgage” is not accurate. A more accurate name would be “anaconda mortgage,” because like the anaconda snake, a reverse mortgage will usually swallow up your home, so that it cannot be left to your children as an inheritance.

A reverse mortgage requires that all the owners of the home be at least 62 years old. You can choose to receive a lump sum loan, a loan that comes to you in monthly installments, a line of credit, or a combination of the three.  The bank does not “pay” you. You are borrowing money, the same as with any other mortgage. The difference is that you do not have to make any payments to the bank until you are no longer living in the home. The bank charges large fees when you first get the reverse mortgage, and charges you interest and fees every month. Since you are not making payments, the bank is earning compound interest. The interest and fees you are not paying are added to your loan every month, the interest amount increases every month, and you owe the bank more and more every month.  It is amazing how quickly the balance owing grows to a large amount.

If you die or move out of your home, the entire loan balance must be paid.  If a husband and wife have a reverse mortgage together, when both of them die or move out of the house, the entire balance must be paid. Many times, the loan balance is so large that the children cannot afford to pay it off. The bank then forecloses on the mortgage. Often, the bank ends up owning the home. The bank can then sell the home at a profit, and keep all the profit, in addition to the interest and fees that were charged. The children get nothing.

Also, a reverse mortgage makes it impossible to protect your home from nursing home costs. One of the best ways to protect your home from nursing home costs is to transfer it to an irrevocable trust for your children, and to keep a life estate in the property. A reverse mortgage does not allow you to use this asset protection technique. Also, with a reverse mortgage, if you have to go into a nursing home, the bank will demand that you pay the entire balance of the loan.  Since you will probably not be able to pay off the reverse mortgage, you either have to sell the home, or the bank will foreclose.  When your home is sold, the reverse mortgage could eat up all of the money from the sale.  If it doesn’t, then the bank will take everything that is owed them, and you will end up with some cash.  That cash will disqualify your from Medicaid (unlike a life estate in the home, which would have been an exempt asset).

If you absolutely need more income to survive, before getting a reverse mortgage, see if your children or other loved ones would be willing to buy a remainder interest in your home, with your keeping the right to live in the home. You could charge a low interest rate, much lower than the bank would, and have your children pay a monthly amount, without any down payment. If they could afford to do that, you could have your increased income, and they could end up with the home at a low cost.

© OKURA & ASSOCIATES, 2011

Many senior citizens are worried about probate and death taxes.  For most people, the fear of probate and estate taxes is misplaced.  The greatest threat to our hard earned money is not probate or taxes, but nursing home costs.

This year and next year, a person can die with $5,000,000 of assets without any estate tax.  Under current law, beginning 2013, $1,000,000 will be tax free at death.  Estate taxes will not be a problem for most of us.

Probate (a court proceeding) is required when a person dies with assets in his or her sole name.  Although going through probate is inconvenient, it usually is not very expensive.  If a person dies owning a home and bank accounts, the probate might cost $5,000 to $10,000.

Nursing home costs, on the other hand, run $8,000 to $14,000 a month!  If staying in a nursing home costs $9,000 a month, that totals $108,000 a year.  Three years in a nursing home will cost $324,000.  This could wipe out everything a person has saved over a lifetime.

Medicare, which most of us have after age 65, pays only for a maximum of 100 days of nursing home costs.  Even though the rules say that they can pay for up to 100 days, on the average, Medicare only pays for about 25 days of nursing home costs.  As soon as the patient’s condition stabilizes, Medicare stops paying.  The patient then has to use his or her own money to pay $8,000 to $14,000 a month.  To get Medicaid (which is different from Medicare) to pay for nursing home expenses, the patient’s assets have to be below a certain amount.  If you are married, you and your spouse together can have $111,560 in assets and still qualify for Medicaid.  If you are single, you can have only $2,000 in assets.

Some senior citizens, because they don’t want to lose their assets to nursing home costs, will give their assets away to children.  You need to be careful, because when you give away assets, there will be a penalty period during which Medicaid will not help you.  Many people think the penalty period is 5 years.  The penalty period can be shorter or longer than 5 years.  These rules are complicated, and you should not give away assets without expert advice.

If you do get your assets below $2,000 and qualify for Medicaid, the government will help pay your nursing home expenses.  But watch out, because there is a trap.  Even though the home is an “exempt asset” and is not counted when adding up your assets, if you are single, the government can usually put a lien on your home.  Even if you are married, if you are in a nursing home and your spouse dies first, a lien will go on your home.  A lien is like a mortgage.  It guarantees that the government will someday get back all the money it pays for your nursing home expenses.  Your children are forced to sell the home or mortgage it to pay back the government.

Another trap is having your home in a revocable living trust.  A trust is good for protecting your assets from probate.  However, a revocable living trust cannot protect your assets from nursing home costs.  In fact, since May 10, 2003, you cannot qualify for Medicaid if your home is in a trust, even if you have less than $2,000 in assets.  To qualify for Medicaid, the Medicaid office will force you to take your home out of your revocable living trust.  When you take your home out of your trust, the government will be able to put a Medicaid lien on it!

Estate planning is now a lot trickier than it used to be.  Many senior citizens who have trusts think they are safe.  They actually face the risk of nursing home costs, which for the ordinary person, is a far greater threat than probate or taxes.

NEW LAW:  TRANSFER ON DEATH DEED

Hawaii has a new law which allows real estate to go to a beneficiary when the owner dies, without having to go to court for probate. This new procedure requires a new kind of deed, called a “Transfer on Death Deed.” Governor Abercrombie signed Act 173, which creates this new law, on June 27, 2011. The law became effective on July 1, 2011. The law is called the Uniform Real Property Transfers on Death Act.

Let me explain how the law in Hawaii works for anyone who doesn’t have a Transfer on Death Deed. If a person dies owning any real estate in her name only, when she dies, there would have to be a probate proceeding in court before the persons named in the will could inherit. Probate usually takes about one year.  Sometimes it takes much longer. In the experience of our law firm, the attorney’s fees for handling a typical probate without complications can run between $3,000 and $6,500.  If the person dies with $100,000 or less, then the court can handle the probate as a “small estate” proceeding without an attorney. Still, the court charges 3% of the value of the property as a fee, and adds court costs and newspaper publication fees, and often takes as long as an attorney handling a probate case. Even if a person dies owning a tiny portion of land worth only a few hundred dollars, a probate or small estate proceeding is required before ownership can pass to the heirs.

Because of the time and expense caused by probate, many people use revocable living trusts to avoid probate. Others add a joint owner to the property to allow the joint owner to inherit without probate. Adding a person as a joint owner creates special problems, because then you are actually giving away half of the property at the time the joint owner is added.

Now, with the new Transfer on Death Deed, it is possible to avoid probate without a revocable trust and without adding a joint owner to the property. A Transfer on Death Deed names a beneficiary who will inherit the property upon death of the current owner.  It is similar to a “pay on death” bank account or credit union account, where upon your death, the money goes to the beneficiary you named. With a Transfer on Death Deed, you still own the property, you can still sell it or mortgage it, and you can change your beneficiary at any time. Yet, if you die, the property goes to your beneficiary without having to go to court for probate. To cancel or change a beneficiary, the legal document showing the change must be recorded in the Bureau of Conveyances in Honolulu before you die.

The Transfer on Death Deed could be a good idea for some people.  However, it does have some problems of which you need to be aware.  If you have or need an A-B Trust to protect assets from estate taxes, you should probably have your real estate in your trust. Having real estate go directly to a beneficiary could mess up the way the A-B Trust is supposed to work to protect assets from estate taxes. If you are old enough to start being concerned about nursing home costs, then I would not recommend a Transfer on Death Deed, because that kind of deed will not protect real estate from nursing home costs.  Instead, I would recommend transferring the property to an irrevocable trust, keeping a life estate in the property. Also, if you would like the property to be protected after your death in case your child gets a divorce or has enough assets to be taxed by the estate tax, I would recommend putting your property into a generation skipping trust, for asset protection.

The Transfer on Death Deed might be appropriate for someone with a small estate who is not concerned about nursing home costs.

By

Sanford K. Okura

         On July 1, 2011, the Hawai‘i Permitted Transfers in Trusts Act was amended. This is an important change in the law because you can now transfer assets to a trust and receive money from the trust and yet have the trust assets protected from lawsuits.

Under the new law, if you transfer property to an asset protection trust and you have no intent to “defraud, hinder or delay” the creditor, that property is safe from lawsuits. Even if you intend to defraud, hinder or delay the creditor, if the creditor’s claim arises after you transfer property to the trust, the property is safe from lawsuits two years after it is transferred. The protection from claims that arose before you transferred the property to the trust is unclear because there is a mistake in the way that provision was written. The property is not protected from claims of child support or alimony. Property that is transferred to the trust after marriage is not protected from property division in a divorce or dissolution of a civil union. Also, property that is transferred to the trust during the 30-day period before your marriage is not protected unless you give notice of the transfer to your future spouse.

Here are some other important things about the new law: The trust must be irrevocable. When you set up the trust, you can appoint a “trust advisor” who has the power to remove or appoint trustees and to direct or disapprove distributions from the trust. At least one trustee must be a person or a bank or a trust company in Hawai‘i. This means that your best friend could be either the trustee or the trust advisor. He can give you any amount of money you need at any time, and yet, if you are sued, the money and property still in the trust is safe. An asset protection trust can be attractive to anyone concerned about lawsuits.

Under the common law in the United States and England, it was not possible to set up a trust to protect yourself from lawsuits. If you set up a trust that could give money back to you and you put money or property in that trust, someone who won a lawsuit against you could go after the assets in that trust.

In 1989, the Cook Islands adopted the world’s first asset protection trust law, making it possible to set up a trust with a bank in the Cook Islands serving as trustee. Even though you put your own assets in the trust and the trustee could distribute money from the trust to you, the assets were protected from lawsuits. Other countries followed the Cook Islands. There are now probably more than 30 countries offering these trusts. These are called “offshore asset protection trusts.”

In 1997, Alaska became the first state in the U.S. to enact laws allowing asset protection trusts. Other states followed. In 2010, Hawai‘i became the 13th state to join this group. You do not have to go to a foreign country to set up these trusts, so these are called “domestic asset protection trusts.”

The law adopted by Hawai‘i in 2010 was not very helpful to someone who wanted to protect assets from lawsuits. States create asset protection trust laws so that they can attract trust business to their state. Hawai‘i was hoping that the law would encourage wealthy people on the Mainland (and in Hawai‘i) to move their money into trust accounts with Bank of Hawaii, First Hawaiian Bank and Central Pacific Bank. These are the three Hawai’i banks that act as trustees of trusts with large accounts. The 2010 law did not attract trust business to Hawai‘i. The Hawai‘i Legislature saw the problems and amended the law.

We do not yet know how well asset protection trusts will stand up in court. One thing is certain: we now have a better chance of protecting assets from lawsuits than we ever had before.

In last month’s column I explained that Advance Health-Care Directives have two parts.  One part is a “Durable Power of Attorney for Health Care Decisions.”  It lets you name the person who will make medical decisions for you if you can’t make your own decisions.  The other part is a “Living Will.”  It lets you decide whether you want your life prolonged after you are no longer able to communicate.

I often see a problem with Advance Health Care Directives.  By signing the standard form without customizing it, you are saying that your agent can make all decisions for you, but you are also making your own end of life decisions.  That is a conflict.  You should either have your agent make the end of life decisions, or you should make them, not both of you.  That is why we prepare the Advance Health Care Directive for our clients, rather than having them sign one at the hospital.

I once read an article entitled “Living Wills Don’t Always Work – Or Get Followed.”  The article mentioned a physician in the mainland who had a heart attack.  He had a living will.  His wife, who also was a physician, knew it was too late to save him.  She told the emergency room doctor to stop resuscitation attempts.  He wouldn’t listen to her.  It took her 29 hours to convince them to remove the life supporting equipment. 

If this happened in Hawaii, I believe the result would be the same.  The standard living will says: “I do not want my life to be prolonged if . . . I have an incurable and irreversible condition that will result in my death within a relatively short time.”  When paramedics first arrive to help someone who has collapsed, they don’t know if the condition is “incurable.”  They don’t know if the condition will result in death “within a relatively short time.”  Therefore, the living will does not apply.  They will do all they can to help the person to live.  Even in the emergency room, it may take some testing and some time before they can determine whether the condition is incurable.  That is why they ignore the living will.  They have to.  They don’t want to sit back, let the person die, then risk being sued by the family for not saving the person’s life.

Therefore, you should not expect the living will to be followed until the crisis is over and the doctors are reasonably sure that the patient will never regain consciousness.

If you do not want to be revived when your heart stops beating, then you need a document different from a living will.  You need a “comfort care only” document.  The law used to provide that you can get this only if your doctor certifies that you are terminally ill.  However, in 2006 the Hawaii legislature changed this law.  Now, you can have a “comfort care only” document even if you are not terminally ill.  It has to be signed by you (or, in some cases, by your agent) and by two adult persons who personally know you.  The “comfort care only” document says that you should not be given chest compressions, rescue breathing, electric shocks or medication if your heart stops beating or if you stop breathing.  The old law also required that you wear a “comfort only” bracelet or necklace, but the new law only requires the legal document.  When emergency personnel or other health care providers see the document, they are not supposed to revive you.  But the law gives them an out.  If their own safety or the safety of others requires them to revive you, they may do so.  Also, if a health care provider’s own conscience requires him to revive you, he may do so. 

It is possible that many doctors don’t know about this “comfort care only” law.  If you want to be sure that your Advance Health Care Directive is followed, tell your loved ones to insist that the doctors honor it.  If you have a “comfort care only” document, you might even tell your loved ones to delay calling the rescue squad if your heart stops beating.  We have a right to leave this life peacefully.  We need to ask our loved ones to help us enforce that right.

Everyone should have Advance Health-Care Directives.  “Advance Health-Care Directives” are instructions which you are giving now (while you can still make decisions) about how you want doctors and hospitals to take care of you when you can no longer make your own decisions.

Most Advance Health-Care Directive forms have two main parts.  The first part is a Power of Attorney for Health-Care.  The second part is a Living Will.

A Power of Attorney for Health-Care is different from an ordinary Power of Attorney.  In an ordinary Power of Attorney, you give someone the power to sign legal papers for you, and to handle your money and property.  In a Power of Attorney for Health-Care, you give someone the power to make medical and other health-care decisions for you.  This person is called your “agent.”  It is wise to name alternate agents.  For example, if you are married, your spouse could be your agent.  One of your children could be your “alternate agent” in case your spouse dies or becomes incapacitated.  If you don’t have a spouse or children, brothers or sisters or friends could be your agent and alternate agents.  It is possible to name more than one agent to serve together at the same time as “co-agents.”  If you name two or more agents as co-agents, it is very important to specify whether any one of them can make decisions for you alone, or whether they have to make decisions by majority vote.  If there is any possibility that two or more agents could disagree on their decisions, then it is best to have only one initial agent, with alternate agents listed one at a time.

In your Power of Attorney for Health-Care, you get to choose whether your agent can start making decisions for you immediately, or only after you become incapacitated.  If you have complete trust in your agent, my opinion is that you should let the agent have the power to make decisions for you immediately.  If the Power of Attorney for Health Care says that the agent can make decisions only after the person is incapacitated, then, in order to make decisions for the person, the agent will have to prove that the person is incapacitated.  This is done by having a physician examine the person and then sign a certificate stating that the person is incapacitated.  It may take time to make arrangements for a physician to sign the certification of incapacity.  In the meanwhile, the agent will not be able to make medical decisions for the person.  Therefore, if you totally trust your agent, the safest thing to do is to say in your Health-Care Power of Attorney that your agent can make decisions for you immediately, even if you are still healthy.  You can always override your agent’s decisions while you are mentally competent.

The other main part of the Advance Health-Care Directive is the Living Will.  The Living Will is different from a Living Trust.  A Living Trust is used to avoid probate.  In the Living Will, you make a choice about how you want to be treated if you are in a coma or otherwise unable to communicate, and if there is no reasonable chance for recovery.  These are your choices: 1) you want them to “pull the plugs” and let you die naturally; 2) you want them to keep you alive as long as possible; 3) you want your agent to decide whether they should “pull the plugs.”  You also get to decide whether you want tube feeding of water and nutrition or whether you want tube feeding to be removed if there is no reasonable hope for recovery

The Advance Health-Care Directive Law changed in July, 1999.  If your Living Will or Power of Attorney for Health-Care was made before July, 1999, it is still legal as long as it was legal at the time it was made.  However, if your Advance Health-Care Directive is not in the form approved by the Legislature in the 1999 law, you may want to update your document.  The new form is more complete.

You can get an Advance Health Care Directive form at no cost at most hospitals, but I recommend getting one through an estate planning attorney, because I have seen many filled out incorrectly.

Here is a Medicaid rule that often surprises those in nursing homes: if your home property is in a Revocable Living Trust, you cannot qualify for Medicaid for nursing home costs until you take your home out of the trust.  However, if the healthy spouse is living in the home, the Medicaid worker generally ignores the rule, and does not require the home to be taken out of the trust. Then the Revocable Living Trust can become a trap, so that your home could later be lost to nursing home costs.

Let me give you an actual example.  Husband and Wife are elderly.  Wife suffers from dementia, and is not mentally competent.  She is in a nursing home.  Husband is healthy.  Husband and Wife own a home, which is held in their Revocable Living Trusts.  The trusts say that when both Husband and Wife die, the property will go to their children equally.  Medicaid has been paying Wife’s large nursing home expenses for years. 

Wife’s trust says that her half of the trust assets are to be used for her support. Wife is not mentally competent, so she cannot take her half of the property out of the trust.  Husband can take his half of the property out of the trust, but he can only take Wife’s half out of the trust to put it in her name.  If the property is left in both trusts and Wife dies first, the property will all go to husband, and he may be able to give it to his children.  However, the gift will cause a Medicaid penalty period if he needs nursing home help for himself.  If Husband dies first, the property will all go to wife, a Medicaid lien will probably be placed on it, and the entire property could be lost to nursing home costs. 

There is another option.  Husband could give his half of the property to his children now.  However, if Wife outlives Husband and still owns her half of the property at the time she dies, the government will be able to get reimbursed for Medicaid payments out of her half of the property.  This is not a good situation to be in. 

The problem with this trust is that it does not clearly allow Husband or the children to transfer Wife’s property out of the trust to themselves after she is incapacitated.  The trust provides that after she is incapacitated, her trust assets are to be used for her benefit.  If the trust assets can be used only for her benefit, then since Medicaid is paying her nursing home costs, her assets in the trust may have to be used to pay back the government.  A trust like this may be fine for a single person with no children who wants to make sure that no one gets any of her assets unless some assets are left after she dies.  However, if a person has a spouse or children, or would prefer to have a relative or friend, rather than the government, receive her assets, the trust should be worded differently.

Our law office has seen many different trusts written by many different attorneys.  Most trusts have the problem described above.  Most trusts are written so that the assets may become trapped if the person becomes incapacitated and enters a nursing home.  The reason for this is that most trusts were written to avoid probate or estate taxes.  The attorney who prepared the trust was not thinking about protecting assets from nursing home costs. 

The problem can be solved by amending the trust to make it more flexible.  There should be some way of transferring the assets to someone else in case of incapacity.  If you have a trust, it would be a good idea to have it reviewed to make sure it gives you the flexibility you need in case nursing home care becomes necessary.   

Your will or trust probably says that you give your assets to your children when you die.  (Whenever I mention “children,” I also mean nieces and nephews, brothers and sisters, or anyone else who will be inheriting your assets.)  The problem with giving property or money directly to your loved ones is that it can be taken away from them by death, divorce or taxes.

Let me give you an example.  Suppose you and your spouse die, and leave an inheritance to your daughter.  Your daughter is married, and has children.  She dies before her husband.  When she dies, everything she owns, including the property she inherited from you, goes to her husband.  Her husband remarries.  Then he dies.  Everything he owns, including the inheritance you left for your daughter, goes to his new wife.  Your own grandchildren get nothing.  Your son-in-law’s new wife, who is a stranger to you, ends up owning the property you worked hard for all your life, and your own grandchildren get none of it!

Here is another example:  divorce.  Suppose you and your spouse die, and leave your property to your daughter.  She puts her husband’s name on the property with her.  They get a divorce.  In the divorce, her husband takes half of the property you gave to your daughter.  Even if your daughter does not put her husband=s name on the property, in a divorce, he may be able to get half of the growth in value.

Here is another way you can unintentionally hurt your children by giving them an inheritance.  Suppose when you and your spouse die, you leave your son an inheritance worth $400,000.  Your son is a hard worker.  He saves money and invests.  He becomes successful.  The years go by.  Your son dies.  When he dies, his estate has to pay estate taxes before his children can inherit his assets.  He is in a 50% estate tax bracket.  The property you gave your son as an inheritance has grown to $600,000 in value.  Therefore, the inheritance you gave your son increases his estate taxes by $300,000 when he dies.  Your grandchildren get only half of the property you left for your son! The IRS gets the other half.

There is a way to avoid the kinds of problems I describe above.  The answer is a special kind of trust called a “generation skipping trust” or “dynasty trust.”  Here is how it works.  When you and your spouse die, the trust does not give your assets directly to your children.  You may have the trust split into separate trusts so that each of your children gets his or her own trust.  Each son or daughter becomes trustee of his or her own trust.  As trustee, they can control their own inherited assets.  Each son or daughter is also beneficiary of his or her own trust.  Anytime they need money, they can take out of the trust any amount of money they need for their own health, education or support.  To get money out of the trust, all they have to do is write a check from the trust account to themselves.  It is that simple.

As Trustees, your children have control of your assets after you die.  As Beneficiaries, your children can use the assets.  Yet, technically, they do not own the assets; the trust does.  Therefore, when your children die, the inheritance you left them does not go to their spouses; it is guaranteed to go to your own grandchildren.  If there is a divorce, the divorcing spouse cannot take away any of the inheritance you left to your own child.  If your son or daughter dies wealthy, there is no estate tax on the assets in the generation skipping trust, no matter how large it may grow!

If your trust is not a generation skipping trust, this is something worth looking into.

© OKURA & ASSOCIATES, 2011

By

Sanford K. Okura

Here is a 2011 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 and next year.  From 2013, only $1,000,000 will be tax-free. The amount will probably be changed again in the next year or two.  There is now also a Hawaii Estate Tax.  The State Tax Department is saying that $3,500,000 is tax-free.  In my opinion, 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.  I will inform you in this column of further changes and clarifications.

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 2011 and 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 $111,560 in assets and still have Medicaid pay for the nursing home costs for one of them.  This $111,560 is in addition to the following exempt assets, which the government will not count: necessities such as clothing, furniture and appliances; motor vehicles; funeral or burial plans; one burial plot for each family member; one wedding ring and one engagement ring, and up to $750,000 of equity in a home.

If a person is not married, or if both husband and wife need nursing home help, how much in assets can each have and still qualify for Medicaid for nursing home costs? A single person can have $2,000; a married couple can have $4,000.

If you give away assets to your children, how long do you have to wait before you can qualify for Medicaid for nursing home costs without a penalty? The answer is 5 years.    However, this does not mean that you have to wait 5 years before getting Medicaid help.  There are ways to reduce or eliminate the penalty period.

If a person qualifies for Medicaid for nursing home costs, how much of the family income can the spouse keep? The spouse who is not in the nursing home (“community spouse”) can keep all of his or her own income (social security checks, pension checks, etc.).  If the income of the community spouse is less than $2,739 per month, the community spouse can also be given some of the income of the one in the nursing home to bring the community spouse’s income up to $2,739.  The one who is in the nursing home has to use the rest of his or her income towards nursing home costs, except for $50 a month, which can be kept.

When is a probate necessary? Probate is necessary if a person dies with real estate of any value in his name only or as a tenant in common.  With assets other than real estate, probate is necessary in Hawaii if a person dies with assets worth over $100,000 which are not in a revocable living trust or joint account, and do not name a beneficiary.