As estate planning lawyers, we advise clients about the legacy threats that exist so that they can take steps to keep their resources safe and sound. In this blog post, we will look at three of the sources of asset erosion that are out there. We will also explain some of the steps that you can take to preserve your resources for the benefit of your loved ones if any of these threats apply to you.
Federal and State Estate Taxes
The federal estate tax can take a very significant bite out of the inheritances that you want to pass along to your family members. This tax carries an extremely high 40 percent flat rate, but the good news is that there is a relatively robust credit or exclusion. At the time of this writing in 2019, the federal estate tax exclusion is $11.4 million per person. This is the amount that can be transferred before the estate tax would be applied.
You only have to use your exclusion to transfer assets tax-free to people other than your spouse. As long as your spouse is an American citizen, you can bequeath unlimited assets to your spouse free of the federal death tax.
Plus, speaking of the estate tax as it applies to spouses, the exclusion is portable. This means that a surviving spouse would have an $11.4 million exclusion using the figure that is in place this year. The $11.4 million that was allotted to his or her deceased spouse could be added as well to leave a total exclusion of $22.8 million. However, that large exclusion amount expires on December 31, 2025; while it is unknown exactly what the exclusion amount will be after that date, it is likely to fall to approximately $6 million.
In addition to the federal estate tax, there is also the federal gift tax that exists to stop people from giving lifetime gifts to avoid the death levy. The exclusion applies to large lifetime gifts along with the estate that will be passed along after your death.
Here in New York where we practice law, there is also a state level estate tax that can enter the picture, and the exclusion is significantly lower at $5.74 million. As a result, it would be possible to face state-level exposure even if you are federally exempt.
Our estate planning lawyers can review your situation and make recommendations with regard to the estate tax efficiency strategies if your estate is in taxable territory on one level or another.
Various different types of irrevocable trusts are often utilized under these circumstances. These would include generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, irrevocable life insurance trusts, and charitable lead trusts.
Eventuality of Aging
Clearly, most people are not going to have to worry about asset protection as it applies to the estate tax because of the high exclusion. However, there is another potential legacy-erasing expense that everyone should be aware of, because it can impact people that are not super wealthy.
The majority of senior citizens qualify for Medicare coverage as a source of health insurance. There are some out-of-pocket expenses for services that are covered, so you should prepare for them in advance, but they are not overwhelming for most people that have planned ahead for retirement in an effective manner.
Unfortunately, the Medicare program does not pay for a stay in a nursing home or assisted living community, and most seniors will need help with their activities of daily living at some point in time. Long-term care is very expensive, with the typical annual charge for a private room in a nursing home in our area exceeding $170,000.
According to Genworth Financial, which is a company that sells financial products for seniors, the cost will increase by 5% per year over the next five years. If this persists into the foreseeable future, the numbers could be considerably larger if you need long-term care in a couple of decades.
If you combine this with a stay in an assisted living community before you enter a nursing home, everything that you intended to leave to your loved ones could wind up in the coffers of long-term care facilities.
Medicaid is a government health insurance program that does pay for long-term care. This is the nursing home asset protection solution of choice for most people, and we can help you take advantage of it if you develop a relationship with our firm at the right time.
The other type of asset protection we will touch upon here is the matter of asset protection for business owners. When you are establishing a business, you should utilize a structure that clearly separates your personal assets from the actions of your business entity. Limited liability companies and family limited partnerships are two commonly utilized business structures that provide asset protection, and they can be used to avoid estate taxes as well.
Attend an Upcoming Workshop!
Our attorneys have schedule a number of workshops, and you can obtain a great deal of useful information if you attend the session that fits into your schedule. Click the following link to learn more: Estate Planning Workshops.