Elder Law News and Updates

Giving Your Home to Your Children Can Have Tax Consequences

Monday, 23 January 2012 11:00

Many people wonder if it is a good idea to give their home to their children. While it is possible to do this, giving away a house can have major tax consequences, among other results.

When you give anyone property valued at more than $13,000 in any one year, you have to file a gift tax form. Also, under current law you can gift a total of $5 million over your lifetime without incurring a gift tax. If your residence is worth less than $5 million, you likely won't have to pay any gift taxes, but you will still have to file a gift tax form. (And Congress may change the gift tax exemption, which is now scheduled to revert to $1 million at the end of 2012 unless Congress acts.)

While you may not have to pay gift taxes on the gift, if your children sell the house right away, they may be facing steep taxes. The reason is that when you give away your property, the tax basis (or the original cost) of the property for the giver becomes the tax basis for the recipient. For example, suppose you bought the house years ago for $150,000 and it is now worth $350,000. If you give your house to your children, the tax basis will be $150,000. If the children sell the house, they will have to pay capital gains taxes on the difference between $150,000 and the selling price. The only way for your children to avoid the taxes is for them to live in the house for at least two years before selling it. In that case, they can exclude up to $250,000 ($500,000 for a couple) of their capital gains from taxes.

Inherited property does not face the same taxes as gifted property. If the children were to inherit the property, the property’s tax basis would be "stepped up," which means the basis would be the current value of the property. However, the home will remain in your estate, which may have estate tax consequences.

Beyond the tax consequences, gifting a house to children can affect your eligibility for Medicaid coverage of long-term care. There are other options for giving your house to your children, including putting it in a trust or selling it to them. Before you give away your home, consult an elder law attorney who can advise you on the best method for passing on your home.

Economists Say That Tightening Medicaid Rules Would Barely Increase Demand for Private Insurance

Monday, 23 January 2012 10:56

It is sometimes claimed that reducing the amount of assets an individual can keep while qualifying for Medicaid would increase the purchase of private long-term care insurance coverage.

Now, two professors of economics have estimated that tightening Medicaid asset rules would do little to encourage the purchase of long-term care insurance policies.

Although Medicaid recipients may keep only about $2,000 in assets in most states, their spouses may retain between $22,728 and $113,640, depending on their particular state. The minimum and maximum are determined by federal law but individual states’ limits may set their own limits within these parameters.

In an article published in the Fall 2011 issue of theJournal of Economic Perspectives, Jeffrey R. Brown of the University of Illinois and Amy Finkelstein of the Massachusetts Institute of Technology estimate that a $10,000 decrease in the level of assets an individual and their spouse can keep while qualifying for Medicaid would increase private long-term care insurance coverage by 1.1 percentage points.

“To put this in perspective,” they write, “if every state in the country moved from their current Medicaid asset eligibility requirements to the most stringent Medicaid eligibility requirements allowed by federal law, this would decrease average household assets protected from Medicaid by about $25,000. This, in turn, would increase the demand for private long-term care insurance by only 2.7 percentage points. While this represents a large increase in insurance coverage relative to the baseline ownership rate, the vast majority of households would still find it unattractive to purchase private insurance.”

Overall, Brown and Finkelstein are pessimistic about the prospects for encouraging more Americans to buy long-term care insurance unless Medicaid is completely restructured or done away with altogether. They note that long-term care insurance is a poor deal, particularly for men, who get back only about 33 cents on the premium dollar they spend, and that for a 65-year-old man of average wealth, 60 percent of the private insurance benefits would have been paid by Medicaid.

But the authors say that even if the implicit Medicaid “tax” on long-term care insurance were eliminated, “other factors could still prevent the market for long-term care insurance from developing.” These factors include the availability of informal insurance provided by family members, the liquid assets in the home serving as a “buffer stock of assets,” and the difficulty many individuals have in “making decisions about long-term, probabilistic outcomes.”

To read the article, “Insuring Long-Term Care inSave the United States,” click here.

For a commentary on the article inForbes magazine, click here.

Housing Options for Low-Income Seniors

Friday, 13 January 2012 08:07

Rents are rising, making it difficult for seniors on fixed incomes to be able to afford housing. In order to ensure that there is some affordable housing for seniors, the government funds several low-income housing programs.

The two main types of government-funded housing are public and subsidized. Public housing is housing owned by a housing authority, and the housing authority acts as your landlord. Subsidized housing is housing owned by a private landlord who receives subsidies in exchange for renting to low-income seniors. In both programs, your rent is calculated as a percentage of your income.

Each program has different eligibility requirements, and the exact requirements vary from state to state and program to program. In general, to be eligible, you must be above a certain age (62 for federally subsidized public housing) and below a certain income. To apply, you need to request an application from each housing authority or program you want to apply to.

Unfortunately, there are often more applicants than housing available, and the housing authority often puts applicants on waiting lists. Because of the wait, it is important to apply to as many different housing programs as you can, and to keep track of your applications and your place on the waiting lists.

Report Finds Gaps in Medigap

Friday, 13 January 2012 08:05

A new report by the General Accounting Office (GAO) finds that Medigap policies are expensive, offer only modest prescription drug coverage, and leave policyholders with high out-of-pocket costs.

Purchasers of Medigap policies can choose from among 10 standardized plans. Nearly two-thirds of those with a standardized Medigap policy purchased one of two mid-level policies that cover Medicare's cost-sharing requirements and selected other benefits but do not offer prescription drug coverage. Only 8 percent of policyholders bought policies offering drug coverage. Reasons for the low usage include the price and availability of the policies and their limited prescription benefits. In Delaware, for example, no insurer offers a Medigap plan with prescription drug coverage and in Rhode Island only one insurer offers such a plan.

The average annual premium for a Medigap policy was $1,300 in 1999. Plans with prescription drug coverage averaged about $1,600, compared to $1,150 for plans without the coverage. Despite these premiums, Medigap purchasers continue to have high out-of-pocket costs for health care services, averaging about $1,400 in 1998.

The GAO also found that it pays to shop around for a policy. Premiums vary widely not only from state to state, but within states as well. For example, researchers found that in Texas a 65-year-old consumer could pay anywhere from $300 to $1,683 for plan A, depending on the insurer. In Ohio, plan F could range from $996 to $1,944.

The GAO report, titled Medigap Insurance: Plans Are Widely Available but Have Limited Benefits and May Have High Costs, is available online at:http://www.gao.gov/new.items/d01941.pdf

For more on Medigap coverage, click here.

When Should You Update Your Estate Plan?

Thursday, 22 December 2011 15:03

Once you've created an estate plan, it is important to keep it up to date. You will need to revisit your plan after certain key life events.

Marriage

Whether it is your first or a later marriage, you will need to update your estate plan after you get married. A spouse does not automatically become your heir once you get married. Depending on state law, your spouse may get one-third to one-half of your estate, and the rest will go to other relatives. You need a will to spell out how much you wish your spouse to get.

Your estate plan will get more complicated if your marriage is not your first. You and your new spouse need to figure out where each of you wants your assets to go when you die. If you have children from a previous marriage, this can be a difficult discussion. There is no guarantee that if you leave your assets to your new spouse, he or she will provide for your children after you are gone. There are a number of options to ensure your children are provided for, including creating a trust for your children, making your children beneficiaries of life insurance policies, or giving your children joint ownership of property.

Even if you don't have children, there may be family heirlooms or mementos that you want to keep in your family. For more information on estate planning before remarrying, click here.

Children

Once you have children, it is important to name a guardian for your children in your will. If you don't name someone to act as guardian, the court will choose the guardian. Because the court doesn't know your kids like you do, the person they choose may not be ideal. In addition to naming a guardian, you may also want to set up a trust for your children so that your assets are set aside for your children when they get older.

Similarly, when your children reach adulthood, you will want to update your plan to reflect the changes. They will no longer need a guardian, and they may not need a trust. You may even want your children to act as executors or hold a power of attorney.

Divorce or Death of a Spouse

If you get divorced or your spouse dies, you will need to revisit your entire estate plan. It is likely that your spouse is named in some capacity in your estate plan -- for example, as beneficiary, executor, or power of attorney. If you have a trust, you will need to make sure your spouse is no longer a trustee or beneficiary of the trust. You will also need to change the beneficiary on your retirement plans and insurance policies.

Increase or Decrease in Assets

One part of estate planning is estate tax planning. When your estate is small, you don't usually have to worry about estate taxes because only estates over a certain amount, depending on current state and federal law, are subject to estate taxes. As your estate grows, you may want to create a plan that minimizes your estate taxes. If you have a plan that focuses on tax planning, but you experience a decrease in assets, you may want to change your plan to focus on other things. For more information about estate taxes, click here.

Other

Other reasons to have your estate plan updated could include: