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.