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

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

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.

            Before we discuss these procedures, let’s review the definition of an “estate.”  When a person dies, that person is called a “decedent.”  If the person has a revocable living trust, all assets in the trust are part of the trust estate. These assets will go to beneficiaries according to the terms of the trust.  They are not included in the “decedent’s estate.” The decedent’s estate includes assets which were in the name of the decedent only, without a beneficiary, and without a joint tenant. Also, assets owned by the decedent as a tenant in common are part of the decedent’s estate. The decedent’s estate is sometimes called the “probate estate” or simply, the “estate.” Assets which have a beneficiary named, such as an IRA or life insurance, go directly to the beneficiary without probate. Also, assets that are held in joint tenancy or tenancy by the entirety go to the surviving owners without probate.  These assets are not part of the decedent’s estate.

            Suppose a person dies with the following assets:  $1,000,000 of real estate in his revocable living trust; $100,000 in a joint bank account with his wife;  $50,000 in an IRA with his daughter as beneficiary; 1/5 of a vacant lot worth $500,000 which he owns with his brothers and sisters as a tenant in common, and $5,000 in a credit union account in his name only. Upon death, the $100,000 of real estate owned as tenant in common and the $5,000 in the credit union account would have to go through a probate proceeding.

            This estate would have to go through probate because the value is more than $100,000.  If this person had put his 1/5 share of the vacant lot into his revocable living trust, then there would have been no need for a probate.

            If a person dies with $100,000 or less in assets, with no real estate, the assets can be collected by using an Affidavit for Collection of Personal Property.  An “affidavit” is a notarized statement. The Affidavit for Collection of Personal Property must be signed by the person claiming the property, and must be accompanied by a death certificate. The affidavit form is sometimes provided by the financial institution.  Otherwise, it can be obtained from the court or from an estate planning attorney. Motor vehicles can be claimed by signing an affidavit at the county Department of Motor Vehicles. The value of motor vehicles does not have to be counted to see if the decedent had more than $100,000.

            If the person dies with any real estate in his name only or as a tenant in common, even if the estate is not more than $100,000, a court proceeding is necessary.  The Small Estates division of the circuit court can help you with a small estate proceeding without your having to hire an attorney. They charge a fee of 3% of the value of the estate, plus court filing fees and newspaper publication costs. If there are no complications, a small estate proceeding takes an average of 10 to 12 months, which is about as long as a regular probate should take.

            One disadvantage of the small estate proceeding is that you cannot sell the property until everything is finished. If you want to sell the real estate without having to wait for a year or so, you would probably be better off hiring an attorney to do an informal probate proceeding.  With an informal probate, you can start advertising the property for sale immediately, and you can sell it as soon as the court appoints a personal representative, which may take about 6 weeks after you retain an attorney.

© OKURA & ASSOCIATES, 2009

Sanford K. Okura received his Doctor of Jurisprudence Degree from Stanford University in 1976.  He specializes in Estate Planning and Medicaid Planning to protect assets from nursing home costs, probate and estate taxes.

This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)

This column is for general information only.  The facts of your case may change the advice given.  Do not rely on the information in this column without consulting an estate planning specialist.