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Compare chart Irrevocable Trust, Revocable Living Trust, Non-Grantor Trust, LLC

Posted on: January 21, 2019 at 2:39 am, in

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For those of you not familiar with the 2005 Tax Reduction Act, some of the provisions address specific transfers by seniors under the new Medicaid nursing home provisions. Under the new provisions, before seniors qualify for Medicare assistance into a nursing home, they must spend-down their assets. These new restriction have a 5-year look-back. The look-back used to be 3 years.
By a vote of 216-214, the U.S. House of Representatives passed budget legislation that will impose punitive new restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care. Act of 2005, click on PDF: Deficit Reduction Act 2005. Search for “transfer of assets provision” in the pdf document.

What’s Medicaid?

What’s Medicaid? Medicaid is a government assistance program for people over the age of 65 or who are disabled. Medicaid assistance was designed for those who could not afford medical expenses (for the poor) but Medicaid has become the default for the middle class. The middle class has become the new poor.
Medicaid estate planning and Medicaid rules are complicated. The government is mandating a 5-year look-back on any transfers you may have made to disqualify you from entering the nursing home. Before the 2005 Tax Reduction Act it was 3 years. The transfer of any assets by the elderly has taken a notation of a “fraudulent conveyance” or in government parlance “deprivation of resources.” These new rules are spousal impoverishment programs designed to punish the healthy spouse. If one of the spouses gets sick, all resources have to be spent before you can qualify for government assistance. These new restrictive rules punish the healthy spouse leaving the healthy spouse at the mercy of welfare or her children. It’s very humiliating when seniors have planned their retirement based on their ability to keep their home.

Assets That You Must Spend Down Before You Can Qualify for Nursing Home Assistance:

ANYTHING YOU OWN IN YOUR NAME OR TOGETHER WITH YOUR SPOUSE. Cash, savings, checking, certificate of deposits, U.S. Savings bonds, credit union shares, Individual Retirement Accounts (IRA), nursing home trust funds, annuities, living revocable trust assets, any revocable Medicaid estate planning trust, real property occupied as a home, other real estate you hold as investment property or income producing property, cash surrender value of your life insurance policy, face value of your life insurance policy, household goods and effects, artwork, burial spaces, burial funds, prepaid burial if they can be canceled, motor vehicles, land contracts, life estate in real property, trailer, mobile home, business and business property, ANYTHING IN YOUR NAME OR YOUR POSESSION.

What is “Fraudulent Conveyance” in Medicaid Estate Planning?

What do you mean by “fraudulent conveyance” or “deprivation of resources”? If you give away your assets and you do not receive an equal amount (value) in return, the transfer is a deprivation of resources and you have committed a fraudulent transfer, (you give your house to your children for $100.00 when the fair cash value of your home is i.e. $150,000). If you gave your house to your children for $100 sixty months (5 years) before you entered the nursing home, you “deprived your resources” from the nursing home expenses. Unwittingly, you also incurred a gift tax on the difference between the $100.00 and the $150,000 and in addition you may have cheated the government out of Estate Taxes.

Federal Gift Tax Rules in Medicaid Asset Protection & Estate Planning:

The federal gift tax rules apply to the transfer by gift of any property. You make a gift if you give property (including money), or give the use of property, or give the income from property without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
The general gift tax rules are that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:
  • Gifts that are not more than the annual $12,000 $13,000 exclusion for the calendar year beginning in 2006 (This is called the Annual gift tax exclusion for any 12 month period, see below).
  • Tuition or medical expenses you pay directly to a medical or educational institution for someone,
  • Gifts to your spouse,
  • Gifts to a political organization for its use, and
  • Gifts to charities.
  • Annual gift tax exclusion. A separate annual gift tax exclusion applies to each person to whom you make a gift. For 2007 2010, the annual gift tax exclusion is $12,000 $13,000. Therefore, you generally can give up to $12,000 $13,000 each to any number of people in 2007 2010 and none of the gifts will be taxable. However, gifts of future interests cannot be excluded under the annual exclusion provisions. A gift of a future interest is a gift that is limited so that its use, possession, or enjoyment will begin at some point in the future. A federal Gift Tax return is filed on form 709 for taxable gifts in excess of the annual exclusion.

Filing a Gift Tax Return:

Generally, you must file a gift tax return on Form 709 if any of the following apply:
  • You gave gifts to at least one person (other than your spouse) that have a fair “cash” value of more than the annual exclusion of $12,000 $13,000 for the tax year 2007 2010.
  • You and your spouse are splitting a gift.
  • You gave your spouse an interest in property that will be ended by some future event.
  • Your entire interest in property, if no other interest has been transferred for less than adequate consideration (less than its fair “cash” value) or for other than a charitable use; or
  • A qualified conservation contribution that is a restriction (granted forever) on the use of real property.

Estate Tax & Senior Medicaid Estate Planning:

Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions. On the date of your death, everything in your name is taxable. Take inventory of what you own: Cash, Savings and checking accounts, CDs, Stocks, Mutual Funds, Bonds, Treasuries, Exempts, Jewelry, Cars, Stamps, Boats, Paintings, and other collectibles, Real Estate … main home, vacation spot, investment realty, your Business, Interests in other businesses, Limited Partnerships, Partnerships, Mortgages and notes receivable you hold, Retirement plan benefits, IRAs, or any amounts that you expect to inherit from others.
Many people prefer not to think about what will happen on their death, but none of us are immortal and failure to make proper plans can mean that we leave behind is a mess which has to be sorted out by our nearest and dearest, at great expense and inconvenience, at a time when they are emotionally bankrupt.
Your federal death (estate) tax, up to 55%, is based on the “fair cash value” of your property on the date of your death, not what you originally paid. State probate and death taxes are based on the “location” of your property. Thus, if you own property in different states, each state has to be probated and each will want their fair share.
The only real alternative to a will arrangement is to set up a trust structure during lifetime which, with careful planning, can operate to eradicate probate delays, administration costs, and taxes as well as giving a large number of additional benefits. For these reasons the use of trusts has increased dramatically.

What is Your Gross Estate?

Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include the following:
  • Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs;
  • The value of certain annuities payable to your estate or your heirs; and
  • The value of certain property you transferred within 3 years before your death.

What is Taxable Estate?

The allowable deductions used in determining your taxable estate include:
  • Funeral expenses paid out of your estate,
  • Debts you owed at the time of death,
  • The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse), and
  • The charitable deduction (generally, the value of the property that passes from your estate to the United States, any state, a political subdivision of a state, or to a qualifying charity for exclusively charitable purposes).

The following table applies to Gift Taxes and Estate Taxes (REPEALED in 2010):

If you die in tax yearTaxable Estate ExemptionGift Tax ExemptionEstate Tax
2007$2,000,000$1,000,00045%
2008$2,000,000$1,000,00045%
2009$3,500,000$1,000,00045%
2010$0.00(REPEALED)$0.00(REPEALED)55%
2011$5,000,000$5,000,000rong>35%
2012$5,000,000$5,000,00035%
2013$1,000,00055%
13 times in 32 years, congress has changed the rules. Congress is always tinkering with the “Death Transfer Tax.” For more information on what is included in your gross estate and the allowable deductions, see Form 706.

Medicaid Asset Protection 60 months Before Qualifying for Nursing Home:

You can avoid all of the above unpleasant results and filing requirements with an irrevocable trust implemented 60 months before you plan to qualify for the nursing home. By repositioning your assets (transferring your assets) from you to an irrevocable trust, you will NO longer own the assets:
  • you don’t qualify for the probate process, and
  • you do not have to file an estate tax return,
  • because on the date you qualify for the nursing home you do NOT own any assets,
  • at the time of your death you do NOT own any assets for the probate process,
  • and at the date of your death you do NOT own any assets to report on your estate tax return.
Set up a Personalized, Court-Tested Medicaid Trust now in only a few hours

Should You Consider Moving to Avoid State Estate Taxes?

Posted on: January 5, 2019 at 4:46 am, in

Wealthy individuals or couples who have reached maturity do not need to worry about raising their children or paying bills. Money gives them the financial freedom, economic stability and peace of mind to do what they want. As estate (death) taxes rise, wealthy individuals wonder if it is financially beneficial to move to a more asset-friendly state to protect their assets.
Many “snowbirds” have vacationed in the warm weather states of Florida or Texas, so it is not a dramatic “leap of faith” for them to consider moving to these low-tax states permanently to protect their assets. But are the financial benefits in a more tax-friendly state attractive enough to justify the costs, expenses and hassles of moving? Here is an answer to this very important question.

Disadvantages of Moving to Low-Tax State

When you have lived your entire life in one state, you build up emotional, spiritual and social ties. Your core family may be concentrated in one area, but most Americans are very mobile. You might have good friends in your home state or you might have grown comfortable with the convenience of your home area. You also wonder about the costs of moving.
Many low-tax states have vibrant communities of people who have moved from high-tax states. So if people are socially-friendly and charismatic, they can make new friends. The Internet has made it easier to communicate over long distances, so your family will be electronically close. If you compare the money that can be saved by avoiding a high estate tax to moving costs, it might make sense to move financially.

Governments with High Debts Must Increase Taxes

With government debts rising, the primary way they can balance their budgets is to increase tax rates. The estate (death) and inheritance taxes are popular ways to generate revenue by transferring a portion of the wealth from private families to the public coffers. The government has been modifying the level at which the tax is “triggered” and experimenting with different rate levels.
According to W. Rod Stern, attorney-at-law, Entrepreneur Magazine’s Legal Guide Estate Planning, Wills and Trusts affect an estimated 1 to 2% of American household estates are large enough to incur the estate tax. Most states have what is called an “exemption” for the primary family home. The first step is to compare the value of your estate to that minimum threshold.
Some states realize that if they raise the estate tax exemption, they can attract wealthy individuals. These figures are always changing, but here is a sample of state estate tax exemption levels for 2012:

2013 State Estate Tax and Inheritance Tax Chart

StateType of Death Tax2013 Exemption2013 Top Tax Rate
ConnecticutEstate Tax$2,000,00012%
DelawareEstate Tax$5,250,00016%
District of ColumbiaEstate Tax$1,000,00016%
HawaiiEstate Tax$5,250,00016%
IllinoisEstate Tax$4,000,00016%
IowaInheritance Tax$25,00015%
KentuckyInheritance TaxUp to $1,00016%
MaineEstate Tax$2,000,00012%
MarylandEstate Tax, Inheritance Tax$1,000,000, $016%, 10%
MassachusettsEstate Tax$1,000,00016%
MinnesotaEstate Tax$1,000,00016%
NebraskaInheritance TaxUp to $40,00018%
New JerseyEstate Tax, Inheritance Tax$675,000, Up to $25,00016%, 16%
New YorkEstate Tax$1,000,00016%
OreganEstate Tax$1,000,00016%
PennsylvaniaInheritance Tax$3,50015%
Rhode IslandEstate Tax$910,72516%
TennesseeEstate Tax$1,250,0009.5%
VermontEstate Tax$2,750,00016%
WashingtonEstate Tax$2,000,00019%
If your estate is valued above one of these limits, it makes sense to move to a state that puts you below their estate tax exemption rate. If you time the housing market properly, the sale of your old home could pay for the moving costs to the low-tax state. States know the value of wealthy residents and are offering plenty of financial incentives to encourage you to move.

How do Estate Taxes Vary by State?

Once the estate is valued above the exemption limit, then each state has a different rate that they charge for the death tax. Also in the chart above are figures for estate tax rates in 2013 (these changing very frequently). You should also take into account the rates because they can make a huge difference.
For example, if you calculate the difference between 9.5% and 19% estate tax rates, the amounts are quite dramatic. When you consider probate, estate (death) and inheritance taxes, it makes sense to move to a more asset-friendly state. If you explain to your children (future heirs) that they will inherit more money in a low-tax state, then they may support the move, especially with the ability to communicate.
While the primary reason for moving to a state with lower estate taxes is financial, there is also a philosophical difference in low-tax states. While colder high-tax states try to siphon off the wealth built up by hard-working citizens, the warmer low-tax states emphasize increasing the “productivity” of the state. This can create a better environment in the long run. You should consider moving to avoid state estate taxes if it is financially advantageous to do so.

Another Option:

Another option exists to avoid estate taxes in your own state. UltraTrust.com has many articles on the advantages of the irrevocable trust and how it can save you and your children from having to pay any estate taxes or even having to go through probate.