As the April 15 deadline approaches, following the IRS rules for gifting, transfers to trusts, IRAs, etc. is important but may have serious unintended consequences should you need long term care and Medicaid benefits. Planning ahead is key since it's virtually impossible to predict when a health care crisis may occur.
For example, you may want to give a gift of $14,000 to your children and benefit from the IRS annual gift tax exemption. However, if you need Medicaid coverage within five years, this gift would trigger a waiting period before you can be eligible for Medicaid benefits. While the gift is permissible for IRS purposes, it most definitely is not for Medicaid purposes. This mistake and it's consequences can be quite costly.
Accountants and financial planners may know all of the tax rules, but they are not usually well-versed with the Medicaid laws. It's important for seniors over 65 to consult with both their accountant and an elder law attorney before making gifts and asset transfers.
Note the following tax tips for seniors:
Outright Gifts vs. Gifts to a Trust
When planning ahead to protect assets, it may be wise to transfer assets to a trust rather than to a child directly. Transferring assets to a Grantor Trust may be advantageous as it allows the assets to continue to be taxed at the senior's tax bracket, which is typically lower than the child's tax rate.
A trust can be drafted so that gifts made to the trust are not "completed gifts" and therefore the grantor would not need to file a gift tax return or pay any gift taxes upon the creation of the trust.
In addition, capital gains taxes can be reduced or even eliminated by transferring certain assets to a trust, such as real property or stock.
NYS Estate Tax
New York State Estate Tax exemption amount is currently $2,062,500 per person until March 31, 2015, increasing to $3,125,000 as of April 1, 2015. The State exemption amount will continue to increase over the next four years until it equals the Federal estate tax exemption in 2019.
Real Estate Tax Exemptions
STAR and Veteran's exemptions can be maintained despite the transfer of real property to a trust provided the trust document states that you have the right to live in the house for your lifetime (a life estate). Those exemptions would be lost with an outright transfer of the house.
STAR Exemption Application - Note that you are still the "owner" for purposes of the STAR application. If the tax assessor's office asks for a copy of your Trust, you do not have to provide the entire trust document. You only need to provide the pages evidencing that you are a life tenant or have the equivalent of a life estate.
Retirement Savings and Distributions
Currently, the principal of an IRA or 401K is exempt for Medicaid purposes provided the asset is in "pay status", meaning you are taking monthly distributions. However, while the IRS requires a minimum distribution when the beneficiary reaches age 70 ½ (the so-called "RMD" or Required Minimum Distribution), Medicaid requires that the distribution be "maximized".
Roth IRAs are also treated differently by the IRS and Medicaid. Even though you are not required to take a distribution from a Roth IRA, it must be put it in "pay status" for Medicaid purposes or the principal will not be protected.
Long Term Care Insurance Tax Credits
A portion of your Long-Term Care insurance premium is deductible on your federal income tax return, provided you itemize your deductions. The deduction amount is age based, increasing with every ten years starting at age 41 up to the maximum deduction amount at age 71 and older. New York State allows a tax credit of 20% of annual premiums paid (regardless of age).
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