Tuesday, November 18, 2014

Long-Term Care Insurance: Still a Good Idea

A recent study claims that there is a decreasing need for long-term care insurance, especially for single people.  I am not claiming I can contradict the study's methodology; I am not a statistician, and am not a big math person.  But from my experiences serving people's needs, long-term care insurance is always a good idea, for a few reasons.

First, many people are wealthier than they think.  When I am determining an estate for estate tax purposes, or available resources for Medicaid qualification, people are shocked at how much they have for those purposes.  I often hear "I didn't think I had that much" or "that makes me sound like a rich person."  To use the most dire Medicaid example, 401K resources are considered available to the extent you can withdraw them, even with a tax penalty.  Medicaid knows this could ruin you.  Medicaid doesen't care.

Second, applying for, and receiving, Medicaid can be an exhausting process.  Medicaid rules are a Byzantine structure of federal laws and constantly changing state regulations.  And it seems that lately, the state's response to a Medicaid application is "we are going to deny it, and see if you want to spend the money fighting us on something you clearly qualify for."

Most importantly, if you are single and have a home, that home may go the state to repay Medicaid instead of your heirs.  If you are single, you are wiping out anything you could pass on to anyone, which is a bitter pill to swallow.

There are certainly people who I advise not pick up long-term care insurance.  However, risking a long stay that takes up every penny you have is not worth the gamble when insurance is an option.


Monday, November 3, 2014

What to Gift the Beneficiary Who Has it All

Washington State has one of the smoothest, least intrusive probate systems in the country.  In fact, it might be the easiest.  The trade off, however, is that Washington has an estate tax. If your estate has over $2,000,000, adjusted for inflation as of 2013, you are paying a tax.  In fact, at the highest level, Washington has the most onerous rates of any estate tax in the country.

There are many complex solutions to this problem.  I often believe in simplicity, and there are few things simpler than a formal, structured gifting plan done at the proper time.  Many people are aware of the $14,000 gift tax exemption.  A person can give $14,000 to as many people as they please without having to file a gift tax return.  This $14,000 also does not count against the total federal exemption of $5.34 million.  This means you can give $14,000 to a hundred people, lower your estate value by $1,400,000, and still have $5.34 million left to gift.

The $14,000 is a fine start, but in order to get below the Washington threshold, I recommend the client do some heavy gifting.  So long as there is no worry about edging against the federal limit, using up some of the $5.34 million exemption to get under the Washington estate tax level is a sound idea.  

The question, though, is what to gift?

The key to this choice is what is known as the cost basis.  The cost basis is what you pay capital gains on if you sell an item.  What a beneficiary pays when they sell an item depends on whether they inherit it or receive it as a gift.  This is because of the "step up basis."  Let me illustrate.  Your mother and father bought a house in 1955 and stayed with that house through thick and thin.  When they bought that house in those halcyon days, they paid $45,000.  It just so happens that house is now worth $550,000.  If your parents gift you that house, retaining a life interest, your cost basis is the same as theirs.  That means if you then sell the house for $600,000, you are paying for capital gains of everything over $45,000.  On the other hand, if you inherit the house, you receive a step up basis.  Put simply, the basis steps up to the value at which you received it.  Now, you are only paying capital gains on $50,000 profit.

The key to gifting is to choose assets that have not increased much in value.  Cash will do it.  A stock recently purchased will do it.  Basically, anything that is worth now what it was worth when purchased.

Gifting is an enjoyable part of estate planning.  I like coming up with a game plan.  I always tell clients, however, that our game plan is slow and steady.  The lesson with gifting is like most other lessons involving taxes: if you get cute, they will get you.