When advising individuals about elder care planning, attorneys and CPAs must consider the various tax implications inherent in an elder care or long-term care plan. Starting the process means that more options can be considered and more strategies can be implemented. This article outlines some of the key tax, transfer, and estate issues that advisors should consider, and outlines an alternative technique that can mitigate the negative tax consequences.
Individuals typically begin to consider the costs associated with long-term care as they begin to contemplate the fact that they likely will, at some point in the near future, require additional care and assistance with their activities of daily living. In the authors' experience, many people only begin to think about these issues in their late 80s or early 90s. But because of the various planning limitations, and the all-important five-year look-back period (discussed in greater detail below), the best age for relatively healthy individuals to begin designing and implementing an elder care plan is in the early to mid-60s.
New York Medicaid Rules
In order for an individual to qualify for long-term
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Issues to Consider
An elder care or asset preservation plan can employ various planning techniques, each with its own inherent tax implications. When advising chents, the elder care attorney and CPA cannot overlook several important considerations. Oftentimes, the cheapest and quickest way to transfer assets is through an outright gift to a child or loved one. While tins may seem like an easy solution, there are many unforeseen consequences, both from a tax and a non-tax perspective.
Nontax implications of an outright gift As mentioned above, many individuals may opt to make an outright gift in order to transfer assets. In this case, the transferor (often the aging parent) would deed over his home and transfer other assets (such as bank accounts, brokerage accounts, real estate holdings) to the transferee (often children or loved ones).
A transfer of an asset via an outright gift is the simplest and least expensive way to remove assets from one's name so that the individual can begin planning to eventually receive
The aforementioned questions are just a few of the issues that must be considered while contemplating an outright gift. An outright gift to a child will not protect the asset from the child's creditors and could potentially be lost in a creditor action or in bankruptcy. Additionally, if a child were to get divorced while "holding" a parent's asset, then such asset may end up being divided between the child and an ex-spouse pursuant to a divorce settlement. (Though beyond the scope of tins article, typically assets that are gifted to or inherited by a child will avoid equitable distribution in
A life estate plan is another technique that many elder care attorneys may utilize in the case of gifting a personal residence. An individual may wash to transfer lus home to a child while reserving a life estate, which would preserve the transferor's light to live in the home for the rest of his life and would bar the transferee (often a child) from selling the house without the parent's consent. A transfer subject to a life estate achieves the desired result from a
The tax implications of an outright gift often will, and should, dictate how a transfer should be structured. Under IRC Section 1015(a), with respect to gifted property "the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was acquired by gift" [IRC section 1015(a)], Thus, the transferee's basis in the property gifted via an outright transfer will be the same as the transferor's basis, or carryover basis. As such, individuals considering an elder care plan must determine what the basis in the property being transferred is and how to best plan from an income tax perspective, as well as an elder care planning perspective.
When an asset transferred via an outright gift is later sold, the transferee (generally the children) wall be responsible for the resulting income taxes. It is therefore beneficial to mitigate the income taxes that the child will be responsible for, especially since the child will, most likely, be in a higher income tax bracket. This is especially important in tight of recent increases to both ordinary income and capital gains tax rates. As a result, parents should consider the basis in the property and whether the property has appreciated significantly in value. If the property has appreciated significantly, then an outright gift will result in a canyover basis in the property for the children and high income taxes once the asset is sold.
For example, consider a parent who owns an investment property with a fair market value of
While, from a tax perspective, it would be most beneficial for the paient to retain ownership of the asset until death [in which case the heirs enjoy a step-up in basis equal to the fair market value on the date of the parent's death under IRC Section 1014(a)], this will not work for
With regards to a personal residence, an outright gift or a transfer of the home subject to the paient retaining a hfe estate will result in lost tax opportunities, beyond the loss of the step-up in basis. IRC section 121 allows an individual to exclude up to
It is important to note that the IRC section 121 exclusion will be limited, although available, in the case of a home that is transferred to a child subject to a hfe estate but sold during the paient's lifetime. In this case, the
There are additional significant tax saving opportunities that will be lost if an individual transfers a personal residence outright to a child or other donee, such as the Enhanced STAR Exemption (see http://www.tax.ny.gov/pit/property/star/eligibility.htm) and the Senior Citizens Exemption (see http://www.tax.ny.gov/pit/ property/exemption/seniorexempt.htm). These real property tax exemptions will not, however, be lost if the home is transferred subject to a retamed hfe estate of the transferor who resides in the house and meets all the relevant requirements.
As mentioned above, transferring assets via outright gift for piuposes of
Assets transferred to a properly drafted
To the extent that an individual planning for
Tlie advantage of a properly drafted and administered
Thus, if the settlor reserves the right to receive income from the
It is important to note that not all irrevocable trusts are structured as incomplete gifts from a tax perspective. High-basis assets that have not appreciated significantly in value and from which the settlor does not require income may benefit from being transferred to an IMAP trust that does not provide income and which will not be includable in the settlor's taxable estate. the assets held in such a trust will be viewed as having been transferred via a completed gift from both a
The non-tax benefits of an
Of course, when considering the manner in which to draft the trust from a tax perspective, attorneys and CPAs should discuss with clients not only the various income tax issues desciibed above, but also estate tax considerations, which should never be overlooked in an elder care planning context. If a trust is structured as an incomplete gift from a tax perspective so as to maintain income tax benefits, advisors must consider the potential of both federal and
Consider All the Implications
As outlined above, there are various tax considerations that must be considered when preparing and executing an effective elder care plan whose primary goal is to protect and preserve an individual's assets. In most cases, the most beneficial and effective planning technique is the
A transfer of an asset via an outright gift is the simplest and least expensive way to remove assets from one's name.
FINANCIAL PLANNING TIPS FOR SENIORS
* Analyze whether, and to what extent, retirement assets will last well into retirement, especially in light of longer life expectancies.
* Create a budget that compares income and expenses both before and after retirement.
* Consider an asset preservation plan which includes an irrevocable trust that will protect assets from
* Purchase long term care insurance, if feasible.
* Increase the standard deduction when taxpayer is blind or over age 65.
* Apply for senior citizen real estate tax abatements and other discounts.
* Maintain an accurate and current inventory of all assets owned.
* Update estate planning documents and keep them in a secure location.
* Monitor investment portfolio and other assets with a financial advisor.
* Plan for unexpected contingencies.
* Take into account cost of living increases and healthcare expenses.
* Properly title assets and update beneficiary designations.
* Monitor credit score.
* Retain lines of credit, which may be more difficult to reestablish in the future.
* Consider the financial needs of children, grandchildren, and other loved ones who may not be able to provide for themselves.
Transferring assets via outright gift for purposes of
If a trust is structured as an incomplete gift from a tax perspective so as to maintain income tax benefits, advisors must consider the potential of both federal and
Ronald Fatoullah, JD, is the founder and principal attorney at
The authors would like to thank