Estate Taxes | Okura & Associates - Hawaii Estate Planning Attorneys

PROBATE & TAXES vs. NURSING HOME COSTS

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.

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.

Tag Archive for 'estate taxes'

Probate & Taxes vs. Nursing Home Costs (November 2011)

An Unusual Year for Tax Law (February 2010)

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