The process of estate planning is not strictly about getting assets into the hands of your loved ones after you are gone. It is also very important to preserve your resources, because there are sources of legacy erosion looming that can have a significant negative impact on your legacy.

Estate Taxes

Generally speaking, inheritances are not subject to taxation unless the estate is particularly valuable. Inheritors are not required to pay regular income taxes on bequests, but estate taxes can potentially be imposed before the assets are distributed to the heirs.

We are using the plural because there is a federal tax is applicable in all 50 states, and there are some states in the union that have separate state-level estate taxes.

The vast majority of people are not exposed to the federal estate tax, because there is a hefty credit or exclusion. This is the amount can be transferred before the estate tax would be applied. At the time of this writing in 2019, the federal estate tax exclusion is $11.4 million.

This is allotted to each person, so a married couple would have a total exclusion of $22.8 million. Plus, the exclusion is portable, so when one spouse dies, the surviving spouse could use the exclusion of the deceased spouse to come away with a total exclusion of $22.8 million.

The maximum rate of the federal estate tax is 40%, so it is something to take very seriously. It should be noted that you cannot give gifts while you are living to avoid the estate tax, because there is also a gift tax. This levy is unified with the estate tax, so the exclusion applies to lifetime gifts along with the value of the estate that will be transferred to your heirs after your passing.

We have offices in Pittsford and Bath, New York, and there is a state-level estate tax in our state. It is very possible to be exposed on the state level even if you are federally exempt, because the exclusion is much lower. It is just $5.74 million right now, and the maximum rate is 16%.

There is a unique distinction between the federal tax and the New York state estate tax. Regardless of the overall value of your estate, for federal estate tax purposes the first $11.4 million that is passed along after your death would not be taxed. Only the portion that exceeds this amount would be subject to taxation.

Things are entirely different with the state-level estate tax, because there is a so-called exclusion “cliff.” If the value of your estate is more than 5% over the exclusion amount, the entirety of your estate would be taxed. The exclusion would no longer be available.

Trusts for Estate Tax Efficiency

The existence of these taxes is the bad news, but the good news is that there are different types of trusts that can be used to gain estate tax efficiency. These would include generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, and charitable lead trusts. We will provide detailed explanations of these devices in future blog posts.

Nursing Home Asset Protection

Many people are not aware of the fact that Medicare does not pay for a stay in a nursing home. These facilities are very expensive, and the majority of elders will someday need help with their activities of daily living.

Some 40% of people that are 85 years of age and older have Alzheimer’s disease, and clearly, people with this condition are often going to require nursing home care. And of course, Alzheimer’s is not the only underlying condition that can necessitate the need for a stay in a nursing home.

When we say that nursing homes are expensive, we are talking about $177,000 per year in our area, and the figures are consistently rising.

This is rather gloomy news, but there is a solution in the form of Medicaid, which is a government health insurance program that will pay for nursing home care. Since is intended for people with limited resources, you cannot gain eligibility if you have assets to speak of in your own name.

To account for this, you could convey resources into a special form of Medicaid trust. Because this is a complex area of planning, creation of a Medicaid trust should only be done with the assistance of an experienced Medicaid planning attorney.

Attend a Free Workshop!

You are invited to attend one of our upcoming estate planning workshops. There is no charge, and you can visit our workshop schedule page to get all the details.