Estate Planning Strategies
Introduction:
There are many estate planning strategies and many accompanying ramifications involved in the implementation of those strategies; some legal, some tax etc. Some strategies also involve the use of a trust. Professional legal and tax advice is strongly recommended in conjunction with implementing the following strategies, as well as others. It should also be noted that estate tax laws vary from state to state.
Strategy #1 - Tax Free Gifts
The annual gift tax exclusion for 2014 is $14,000 for an individual giver or $28,000 in the case of a married couple making a gift to any one child or grandchild. It's an excellent way to remove assets from one's taxable estate. Gifts in excess of these amounts require the filing of a gift tax return.
Strategy #2 - 529 College Tuition Plans
Parents and grandparents can also reduce their taxable estates by contributing to a 529 college savings plan for children and grandchildren. The same annual tax free gift limits apply as stated in Strategy #1 but with one very interesting slant. Anyone making such a gift (529 contribution) is permitted to make the equivalent of five years of gifts in one year. For example, when the account is first opened, a parent or grandparent can deposit as much as $70,000 ($14,000 x 5 years) into the account of each child or grandchild, and as much as $140,000 for a married couple. However, such a gift would exhaust one's annual gift tax exclusion for the year of the "front loaded" 529 contribution and also for the subsequent four years.
Strategy #3 - Qualified Personal Residence Trust ("QPRT")
A "QPRT" is a type of trust which affords a homeowner the opportunity to remove the current value of their home from their estate. Such a trust is typically set up in such a way as to effect gifting the value of a residence to heirs, typically over a period of between ten and twenty years. It involves year by year gifting of fractional shares of a residence, but subject to the same $14,000 annual gift limit. To implement this strategy, a qualified appraisal of the subject property is required at the time of the trust establishment. The home's estate tax value is also frozen when the trust is set up. Hence, future appreciation of the property escapes estate tax and if the grantor (giver) outlives the term of the trust, the entire value of the home is removed from the estate. Please consider consulting a qualified estate planning attorney for advice regarding a "QPRT".
Medicaid Ramifications
Generally, most states have "look back" rules with regard to gifts made within a stated period of years prior to applying for and qualifying for Medicaid. For example, one's assets must be under a certain amount in order to qualify for Medicaid, so that a gift of say, $10,000 might still be considered assets of the applicant for purposes of Medicaid qualification, even if the gift had been made a couple of years prior to applying for Medicaid.
Closing Thoughts
Depending on the estate planning strategy employed and the timing and re-positioning of the assets involved, one may be able to A) remove those assets from their taxable estate and B) qualify for Medicaid.
An important thing to note about 529 plans: On the plus side, assets contributed are removed from one's estate. On the negative side, those same 529 contributions remain part of one's assets for Medicaid purposes, because the 529 account balances remain under the control of the account owner. It is for that same reason that assets held in a revocable living trust are not protected for Medicaid purposes. The grantor maintains control through their ability to revoke the trust. Generally, an irrevocable trust will shield assets for Medicaid planning purposes but it is strongly recommended to consult an estate planning attorney regarding trusts.