Medicaid Estate Planning: Maximize Your Results
For those of you unfamiliar with the Tax Cuts Act of 2005, 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 nursing home assistance, they must reduce their assets. These new restrictions have a 5-year retrospective. Hindsight used to be 3 years.
By a vote of 216 to 214, the US House of Representatives passed budget legislation that will place new punitive restrictions on the ability of the elderly to transfer assets before qualifying for Medicaid coverage of nursing home care. seniors. You can link to the new Deficit Reduction Act of 2005 in PDF format by clicking: http://www.rules.house.gov/109/text/s1932cr/109s1932_text.pdf. The section on transfer provisions begins on page 222.
WHAT IS MEDICAID?
What is Medicaid? Medicaid is a government assistance program for people age 65 and older or disabled. Medicaid assistance was designed for those who couldn’t afford medical bills (for the poor), but Medicaid has become the standard for the middle class. The middle class has become the new poor.
Medicaid planning and Medicaid rules are complicated. The government requires a 5 year review on any transfer you have made to disqualify you from entering the nursing home. Before the Tax Cuts Act of 2005 it was 3 years. The transfer of any asset by the elderly has taken the notation of a “fraudulent transfer” or, in government jargon, “deprivation of resources.”
These new rules are spousal impoverishment programs designed to punish the healthy spouse. If one spouse becomes ill, all resources must be expended before she can qualify for government assistance. These new restrictive regulations penalize the healthy spouse, leaving the healthy spouse at the mercy of social assistance or her children. It is very humbling when seniors have planned their retirement based on their ability to keep their home.
ASSETS YOU MUST SPEND
Assets you must spend before you can qualify for nursing home assistance. Anything you own in your name or together with your spouse. Cash, savings, checking, certificates of deposit, US savings bonds, credit union stocks, IRAs, nursing home trust funds, annuities, revocable living trust assets, any revocable Medicaid estate planning trust, real property occupied as a home, other real property you own as investment property or income-producing property, cash surrender value of your life insurance policy, face value of your life insurance policy household items and effects, works of art, burial spaces, burial funds, prepaid burial if they can be cancelled, motor vehicles, land contracts, lifetime real estate, trailers, mobile homes, business and commercial property, and any other thing that is in your name or in your possession.
WHAT DO YOU UNDERSTAND BY “FRAUDULENT TRANSPORTATION”?
What do you mean by “fraudulent transmission” or “deprivation of resources”. If you donate your assets and do not receive an equal amount (value) in return, the transfer is a hardship and you have committed a fraudulent transfer (give your home to your children for $100.00 when the fair cash value of your home is ie $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” of nursing home expenses. You inadvertently also incurred gift tax on the difference between the $100.00 and $150,000, and you may have cheated the government out of estate taxes as well.
HOW IS THE FEDERAL GIFT TAX APPLIED?
Gift tax rules apply to the gift transfer of any property. You make a gift if you give property (including money), or give the use of property, or give the proceeds of property without expecting to receive something of at least equal value in return. If you sell something for less than its full value or make a loan with no or reduced interest, you may be giving away.
The general gift tax rules state that any donation is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts:
– Gifts not to exceed the $12,000 annual exclusion for the calendar year beginning in 2006 (this is called the annual exclusion for any 12-month period, see below).
– Tuition or medical expenses that 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.
– Exclusion of the annual tax on donations. A separate annual gift tax exclusion applies to each person to whom you make a gift. For 2007, the annual gift tax exclusion is $12,000. Therefore, you can generally give up to $12,000 each to any number of people in 2007, and none of the gifts will be taxable. However, future interest gifts cannot be excluded under the annual exclusion provisions. A gift of future interest is a gift limited so that its use, possession or enjoyment may begin at some time in the future. A federal gift tax return is filed on form 709 for taxable gifts that exceed the annual exclusion.
FILING A GIFT TAX RETURN
In general, 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 greater than the $12,000 annual exclusion for tax year 2007.
– You and your spouse are splitting a gift.
– You gave someone (other than your spouse) a gift of future interest that he or she may not own, enjoy, or receive income until some time in the future.
– You gave your spouse an interest in a property that will end at some future event.
– Your entire interest in the property, if no other interest has been transferred for less than adequate consideration (less than its fair “cash” value) or for non-charitable use; gold
– A qualified conservation tax that is a restriction (granted forever) on the use of real property
HOW IS THE INHERITANCE TAX APPLIED?
Estate tax may be applied to your taxable estate at the time of your death. Your taxable estate is your gross estate less any allowable deductions. On the date of your death, everything in your name is taxable. Take inventory of what you own: cash, checking and savings accounts, certificates of deposit, stocks, mutual funds, bonds, Treasury bonds, exempts, jewelry, cars, stamps, boats, paintings and other collectibles, real estate. .. principal home, vacation cash, investment real estate, your business, interests in other businesses, limited partnerships, partnerships, mortgages and notes receivable you own, retirement plan benefits, IRAs, or any amount you expect to inherit from others.
Many people prefer not to think about what will happen when they die, but none of us are immortal and failure to make the right plans can mean we leave behind a mess that must be sorted out by our nearest and dearest, at great cost. . and inconvenience, at a time when they are emotionally bankrupt.
Your federal death (probate) 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 inheritance and probate taxes are based on the “location” of your property. So if you own property in different states, each state should be probated and each will want their fair share of it. The only real alternative to a probate arrangement is to set up a lifetime trust structure which, with careful planning, can work to eradicate probate delays, administrative costs and taxes, as well as provide a host of benefits. additional. For these reasons, the use of trusts has increased dramatically.
WHAT IS YOUR GROSS EQUITY?
Your gross estate includes the value of all property in which you had an interest at the time of your death. His gross assets will also 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 his patrimony or his heirs; and
– The value of certain property that you transferred within the 3 years before your death.
WHAT IS YOUR TAXABLE EQUITY?
Allowable deductions used to determine your taxable estate include:
– Funeral expenses paid with your estate,
– Debts that he had at the time of his death,
– The spousal deduction (generally, the value of property that passes from your estate to your surviving spouse), and
– The charitable deduction (generally, the value of property that passes from your estate to the United States, to any state, to a political subdivision of a state, or to a qualified charity for solely charitable purposes).
HOW GIFT AND INHERITANCE TAXES APPLY TO MY ESTATE:
If you die in tax year 2007, your “taxable estate exemption” is $2,000,000, your “gift tax exemption” is $1,000,000, and you have a maximum estate tax of 45%.
If you die in tax year 2008, your “taxable estate exemption” is $2,000,000, your “gift tax exemption” is $1,000,000, and you have a maximum estate tax of 45%.
If you die in tax year 2009, your “taxable estate exemption” is $3,500,000, your “gift tax exemption” is $1,000,000, and you have a maximum estate tax of 45%.
If you die in tax year 2010, your “taxable estate exemption” is $0.00 (ie, repealed), your “gift tax exemption” is $0.00 (ie, also repealed), and has a maximum wealth tax of 55%.
13 times in 32 years, Congress has changed the rules. Congress is always messing with the “Death Transfer Tax.” For more information about what is included in your gross assets and the deductions allowed, see Form 706.
HOW TO AVOID THESE DESIRABLE RESULTS?
You can avoid all of the above unpleasant outcomes and filing requirements with an irrevocable trust put in place 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 do not 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 his death he DOES NOT have any assets for the succession process,
– and on the date of your death you do NOT have any assets to report on your estate tax return.