Understanding How the New Tax Law Affects Estate Law

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how the new tax law affects estate planning

With just 494 pages, the new tax law creates a lot of major changes. While most Americans are rightly concerned about how the changes will impact their ability to deduct state income taxes and property taxes, there are less publicized aspects of the tax plan that could really impact retirees and those planning for retirement. The law should also make some people take a second look at their old estate plans.

For those individuals who have planned well and amassed significant assets, there are three basic principles to consider – the estate tax, the gift tax, and generation-skipping. These provisions of the Tax Code work in tandem to allow wealthier tax payers to pass money to others without incurring additional taxes.

Estate Tax

In 1916, Congress passed the Revenue Act, which created the modern day estate tax. The IRS taxes estates with assets in excess of the applicable limit. For 2017, the effective exemption was $5.49 million for an individual and $10.98 million for married couples. So, at death, we simply add up all of the applicable assets of the estate. Only the amount in excess of the exempt amount is taxed, but it is taxed at the top rate of 40%. So, a clean example might be an individual with $10 million in total assets. At death, the executor will have to file an estate tax return with the IRS and pay 40% on $4.51 million dollars. This reduces the overall amount passed to the decedent’s heirs by about $1.8 million. That is a pretty big hit.

The new tax law increases the individual exemption to $11 million and $22 million for couples, effectively doubling the amount that can be passed through an estate without triggering taxes. Currently, only about 12,000 federal estate tax returns are filed each year. After all, not many people have those kinds of assets. It is likely that far fewer people will now be subject to the tax.

Gift Tax

From 1916 until 1932, wealthy Americans cleverly learned to avoid paying the estate tax altogether, simply by giving away their money during life. In other words, the same individual from our example above could simply give his or her children $5 million a day before death, and thereby bring his or her total assets below the threshold. Granted, the numbers were different back then, but the issue was the same. People were circumventing the tax.

In 1932, Congress created this tax to limit the total amount that someone can transfer during life. This effectively creates a limit on how much you can give away each year and in total, when combined with the estate exemption limit.

The Gift and Estate Taxes Work in Tandem

In 2017, the annual gift tax exemption was $14,000. In 2018, it bumps up to $15,000. This is the amount that you can give away each year (per person) before triggering a reduction in your lifetime estate tax. Married couples double their exemption. Here is how it works:

Consider a simple example. Assume a single person in 2018 has over $12 million in assets at death. During his last year of life, he wants to give away enough to bring down his taxable estate, which is now just $1 million. He is ‘allowed’ to give away $15,000 per person, so if he has four children, he could arguably give each $15,000, thus reducing his taxable estate by $60,000 in that year.

If this individual planned early by gifting $15,000 per year over a long period of time, he could significantly lower his taxable estate before death. Married couples can double this effort.

Generation Skipping Tax

In 1976, Congress found yet another loophole being exploited. Some were making gifts to grandchildren and great grandchildren in order to maximize their annual gift exemptions. This is taxed as well, however.

Preparing for 2025

The new tax law really opens the door for wealthier taxpayers to reconsider their estate plans. You may have limited time to act to protect your estate, because the new law sunsets in 2025, unless Congress acts to extend it before then. Call (205) 263-0743 to speak with the attorneys of Five Points Law Group to discuss your estate planning changes today.

Preparing for High Cost of Nursing Home Stay

Not all estate planning is about wealth building. In fact, these days most Americans are less concerned about what happens if they die, but rather, they are more worried about what will happen if they live too long. According to the Social Security Administration’s (SSA) life expectancy tables, the average American male who is currently 65 can expect to live 84.3 years of age. A woman aged 65 can expect to live to 86.6.

The SSA reports that 25% of those living past 65 will also live to be over 90, and about 10% of them will live past 95. With longer life and better medical care, people may be living longer, but longer life also means higher medical costs.

Think Your Savings are Safe?

A married couple that has saved $1 million for retirement has done pretty well. By all measures of success, such a couple should feel reasonably proud of their savings and confident that it will last through 20 years of retirement (65 to 85), assuming they have a modest annual budget, they own their home, and healthcare costs can be handled through Medicare.

Average Cost of American Nursing Home Care

A 2015 Cost of Care Survey by Genworth suggests that the national U.S. average cost of long-term skilled nursing home care is about $80,000 per year.  For Alabama, it is around $69,000, and for the Birmingham area, it runs $73,825. According to Lifehappens.org, studies show that the average length of a nursing home stay is about 835 days, costing a total of $200,000. Of course, some people with chronic or severe conditions may require lifelong nursing home care at the end of life. Imagine a five-year nursing home stay: It could easily cost $400,000.

Paying for Care

Fortunately, there is Medicare, right?  Well, not exactly. Medicare only pays for up to the first 100 days of long-term care. Technically, Medicare is only designed to pay for short-term rehabilitation. So, if you need rehab after an injury, Medicare will pay for it, so long as you are making progress and your physicians believe you will recover and be able to return home. If, however, you require long-term care, Medicare will stop, and you will have to pay out of pocket for the care. That is unless you have planned ahead.

Long-Term Care Insurance

Many seniors over the age of 60 are smart to invest in a long-term care insurance policy, but these policies are not cheap. If you have saved a million dollars, you should have to start putting your budget toward high premiums, not to mention the fact that these policies are often quite limited and only cover a year or two of care.

Medicaid as the Primary Payer of Nursing Home Care

For the majority of Americans in nursing homes, Medicaid will pay the bill. For those with a lot of assets, it can be a challenge to understand that there are options for becoming eligible for Medicaid in order to preserve hard-earned wealth. There are often creative estate planning solutions that can shift assets to a spouse living outside of the nursing home in order to avoid having to use your entire retirement income on the nursing home bill. By setting up a qualifying trust or simply changing the ownership of certain assets, many seniors are able to preserve their savings, while ensuring that they are well-positioned to use Medicaid if they ever require nursing home care.

Birmingham Estate Planning Attorneys

If you are approaching retirement or are already in retirement, you should consider the likelihood that you may need to stretch your retirement savings for 30 or more years. Will your savings last that long if you or your spouse require nursing home care? The attorneys of 5 Points Law Group are dedicated to helping you preserve wealth and protect your savings. Call (205) 263-0743 to schedule a private consultation to review your unique retirement and estate plans today.

 

Kristin Waters Sullivan
Kristin Waters Sullivan
As a partner at the Five Points Law Group, Kristin brings her vast experience in Estate Planning and Probate Law to serve her clients’ and their families’ needs.

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