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.

1) gift taxes; 2) Medicaid rules for nursing home costs; and 3) capital gains taxes.

Many people think you can give only $10,000 tax-free to each individual.  Actually, the amount is now $13,000 a year.  This is called the “annual exclusion” from the gift tax.  This year you can give $13,000 to any number of persons without even reporting it to the IRS.

What most people don’t realize is that, in addition to the $13,000 a year, you can actually give away $1,000,000 during your lifetime, tax-free!  The law is that you can die this year with $3,500,000 tax-free and in 2011 with $1,000,000 tax-free.  You can use up part of that $3,500,000 by giving away $1,000,000 tax-free during your lifetime.  Here is how it works.  Suppose you give $100,000 to your daughter today.  $13,000 of that amount is a totally tax-free gift.  $87,000 is a “taxable gift.”  However, that does not mean you have to pay a gift tax.  You file with the IRS a “gift tax return,” which is different from the income tax return you file every year.  On the gift tax return you report that you gave a taxable gift of $87,000.  You use $87,000 of your million dollar lifetime exemption from gift tax, so you do not have to pay any gift tax.  Now you can die in 2009 with $3,413,000 of assets tax-free, in 2010 with everything tax free, or in 2011 with $913,000 tax free.

Don’t rush out and give away assets just because it is tax-free.  There are ways to give away $100,000 of assets and legally report that you only gave away $70,000.  Also, even though you can give away large amounts without any gift tax problems, you might be causing an unexpected Medicaid problem.  You must consider both the gift tax laws and the rules for Medicaid for nursing home costs.

A good reason for giving away assets is to protect them from nursing home costs.  As a general rule, for every $8,850 of assets you give away, there will be a one month penalty period during which Medicaid will not pay for your nursing home costs.  (There used to be a one month penalty for every $7,314 of assets you give away, but it changed to $8,850 in November 2008.)  For example, if you live in a condo worth $350,000 and give it to your children, there will be a waiting period of 39.5 months before Medicaid will help you pay your nursing home bill ($350,000 divided by $8,850 = 39.5 months).  However, there are techniques you can use to legally shorten the waiting period for Medicaid.  Suppose you are 70 years old, and instead of giving your condo to your children completely, you give it to them but keep a “life estate.”  A life estate means you still own the condo for the rest of your life, and you can still live there, but your children already own the “future interest” in the condo.  Using tables provided by the government, we calculate that the value of the future interest you gave your children is not $350,000, but only $138,173.  Therefore, your Medicaid waiting period is only 15.6 months, instead of 39.5 months.  If the nursing home charges $8,000 a month, you could save $191,200 in nursing home costs by using this simple technique!

Finally, the way you give property away can affect the capital gains taxes your children will pay if they ever sell the property.  (See my February, 2005 Estate Planning Insights column on “The Stepped Up Basis.”)  You may want to give away property in a way that lessens your children’s capital gains taxes.

The thing to remember is this:  whenever you give away assets, you may be causing a gift tax problem, a nursing home cost problem, or a capital gains tax problem.  Always seek expert advice before making a gift of more than a few thousand dollars.  

© OKURA & ASSOCIATES, 2009