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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

Estate Planning Update (April 2011)

2011 ESTATE PLANNING UPDATE

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.

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.new.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.