Tuesday, January 28, 2014

States Look to Reducing Estate Taxes to Keep Retirees

The New York Times reports that several states are taking steps to reduce their estate taxes, either eliminating the tax or increasing the exemption. According to the article by Paul Sullivan, five states and the District of Columbia have recently re-evaluated their estate taxes. Indiana and Ohio have eliminated their estate taxes entirely. Tennessee is phasing out its estate tax, and New York, Maryland, and D.C. have begun serious discussions about raising their estate tax exemptions to the federal level.


If New York, Maryland, and D.C. do increase their estate tax exemptions, more states will likely follow suit. From Sullivan's article:

“There is a strong possibility that the gap [between state and federal exemptions] is going to be closed over a few years,” said Jamie C. Yesnowitz, a principal at Grant Thornton and chairman of the American Institute of Certified Public Accountant’s state and local tax technical resource panel. “Once some of these other states see New York and D.C. are doing this, I would find it unsurprising if some of these other states join the bandwagon.”

The reason for the move to reduce estate taxes, says Sullivan, is competition from other states for residents and their tax dollars.

[G]overnors of cold-weather states (along with the District of Columbia) . . . have realized affluent residents are moving to states without estate taxes (and in some cases, income taxes) and in doing so, depriving their old state of the other taxes they paid, like property, sales and income tax.

Tuesday, January 14, 2014

Purchasing Life Estates to Protect Assets

Jeff Marshall recently posted an article on how to use life estates in estate planning on the Marshall Elder and Estate Planning Blog.  Marshall describes how older clients can use life estates to manage health care costs and protect their children's inheritance. From the article:


In the right circumstances, the purchase of a life estate can be an effective means to protect a parent’s assets and a child’s inheritance. For example, a parent may sell his or her home and move in with a child. As part of the arrangement, the parent can purchase a life estate in the child’s home. This transfers cash to the child while giving the parent the legal right to reside in the home for the rest of the parent’s life. The care provided by the child may help the parent remain in a supportive home setting. If a few requirements are met, the cash paid to the child will be protected from the cost of long term care that may be needed by the parent in the future.

As Marshall goes on to explain, a correctly structured life estate can shelter the money paid for the estate from medicaid cost recovery. The medicaid laws specifically allow for this kind of financial protection, laying out the requirements a life estate must meet to qualify. A qualifying life estate will not affect the owner's eligibility for medicaid, and the purchase price will be protected from future long term care costs.

But Marshall cautions against people running out and purchasing life estates in anticipation of long term care bills. Medicaid and health care costs are only one aspect to consider when developing an estate plan. One must also keep in mind tax consequences and other non-Medicaid issues. A life estate will not be an effective estate planning tool in every situation.