Update: The implementation date for the "look back" has been extended from July 1, 2021…
With the federal gift and estate tax exemption currently set at $5.25 million ($10.5 million for couples) and indexed for inflation, only about one-tenth of one percent (0.1%) of estates will pay any tax. Since estate tax is not a concern for most of us, many people tend to think that estate planning is unnecessary. “I have a Will, I’m all set.”
Actually, taxes are only one concern of many, and a good estate plan usually has a number of parts. The Will in many cases is the least important of them. Why is that? For starters, in many families, the most important assets will not be in the estate, and therefore will not be controlled by the Will. For example, when real estate is titled as “joint tenancy with right of survivorship” (often abbreviated as “JTROS”), if one owner dies, the survivor becomes the sole owner of the property. The Will does not determine anyone’s rights in the property, as the deed controls.
Other significant examples where the Will might not play any role in the transfer of wealth are: life insurance policies, bank and investment accounts, and retirement accounts. Each of these categories of assets permits the transfer of ownership upon death by a beneficiary designation. If a bank account names a joint owner or an “in trust for” (“ITF”) beneficiary, then, upon the death of the owner, the account automatically becomes the property of the surviving owner or named beneficiary.
These examples show that virtually all of us have an estate plan, whether we consciously recognize it as such or not. All too often, deeds, beneficiary designations, even Wills, are in the “set it and forget it” category. An estate plan that has not been thought through, and that has not been reviewed or updated on a regular basis, may produce unintended and undesired results.
A further concern for New York State residents is the New York State Estate Tax, which is imposed on estates of $1 million or more. Taxable estates will be subject to tax rates of 4% to 16%. However, there is no gift tax in New York State (and a large window before the Federal tax is triggered), and those with New York taxable estates have an opportunity to avoid the tax by making gifts during their lifetimes.
Let’s take a look at some common mistakes that occur when we don’t pay attention to our estate plan:
Deeds. It’s common for spouses to hold real property together as “tenants by the entirety.” When one spouse dies, and the other becomes the sole owner, the property will be in the probate estate of the second to die. Probate could be avoided if the property were transferred before death, in most cases preferably to a trust which will preserve the opportunity to avoid capital gains tax on any appreciation in value of the property that accrued during your lifetime. Even more serious consequences will result if either or both of the spouses received Medicaid benefits during their lifetimes, as Medicaid will have the right to recover its costs from the equity in the property if it remains in the probate estate. Also, if you are one of two or more owners of real property, you should know whether your deed is in joint tenancy or tenancy in common – the results will be significantly different when one owner dies.
Life Insurance. Many people purchase life insurance and then never give a further thought to whom they named as beneficiaries. Sometimes the beneficiary turns out to be an ex-wife or an ex-husband, or someone who has pre-deceased the insured. If the policy has a cash value, it may turn out to be an obstacle to obtaining Medicaid. It’s a good idea to check on your insurance policies from time to time, to make sure that you have correctly named your beneficiaries, and to be aware of the cash values. Sometimes the cash value has grown to the point where it is virtually equal to the death benefit, and, if so, you should be considering whether it makes financial sense to continue to own the policy, or whether you should move the cash into a different investment.
Annuities. Many seniors invest in fixed annuities, because they often provide a better investment return than savings accounts or CD’s, and, unlike bonds, are not subject to changes in value. However, fixed annuities are rarely a good estate plan, because, unlike life insurance, the income is taxable to the beneficiary after your death. Annuities are an imprudent investment if Medicaid planning may be needed, since they will have to be transferred or liquidated in order to achieve eligibility for benefits. Transfer of ownership is a taxable event, and the original owner will have to recognize all of the accrued income at once. Liquidation may be painful if the annuity has not been held for a number of years, because the owner will likely be forced to pay a penalty for early withdrawal.
Bank Accounts and Investment Accounts. Bank and brokerage accounts will be in the probate estate, unless you have named an “in trust for” (ITF) or “pay on death” (POD) beneficiary. Naming a direct beneficiary is good estate planning, but will not help with Medicaid. For that, you’ll need to think about transferring the account balances to a trust, or to family member or trusted friend.
Retirement Accounts. Your IRA or 401(K) is similar to your bank or brokerage account in the sense that you can name a beneficiary, and, if you do, the account will be transferred to that person directly, without being subject to probate proceedings. The balances in such accounts (but not the required payments made during your lifetime) will be immune from Medicaid, provided that the account is in “payout” status.
Wills and Trusts. Many people are confused about the difference between Wills and Trusts. Here is a simple explanation. Your Will controls the disposition of assets that are in your name when you die. Before any assets can be distributed to your beneficiaries, however, someone will have to go to Court to have the Will admitted to probate and the Executor appointed, and then all payments and transfers will be made under Court supervision. Family members must be notified in advance, and they will have an opportunity to contest the Will in the probate proceeding.
Your Trust controls the disposition of all of the assets that you transferred to it. Even if you created the Trust, funded it, and had the right to revoke it, trust property is not your property, and therefore is not subject to your Will or to probate. The Trustee will distribute the assets in the Trust to the beneficiaries, without notice to family members and without the need for any court proceedings.
If your Trust is a revocable trust, you can be a Trustee and you remain in control of the assets in the Trust. You can amend the Trust or revoke at any time. The revocable trust is an excellent estate planning vehicle. However, it cannot be used for Medicaid planning, because the assets held in a revocable trust will be counted in determining eligibility for benefits. For that purpose, an irrevocable trust will be needed.
Not surprisingly, when you explore the many advantages of planning with a trust, you may conclude that your Will is far from the centerpiece of your estate plan. Your Elder Law attorney will be able to advise you on the type of trust that is best for you, and on the various options you will have in determining the terms and conditions of the trust.
As you probably have guessed by now, estate planning is a vast and complicated subject, and we have barely scratched the surface here. While professional advice is usually needed, there is a lot that you can do on your own: take an accurate inventory of all of your assets; check the beneficiary designations and cash values of your life insurance; and review the beneficiary designations on bank and brokerage accounts, and retirement accounts. Review your Will and any Trusts that you may have created, and ask your attorney to update these documents as appropriate. Consider whether you have made an adequate financial plan should you need long-term care, either at home or in a nursing home.
One final thought: the ruinous cost of long-term care is probably the greatest financial risk that you will face as a senior. Without proper planning for long-term health care costs, your entire estate plan could be at risk as well. Your Elder Law attorney can help you evaluate your estate plan and your long-term care plan at the same time.