Planning Now Can Yield Dramatic Savings inTax and Long Term Care Costs Later

Posted on: October 12th, 2016 by Lawrence A. Friedman

It’s not often that you can save a great deal later by spending a little now.  Yet that is the case when it comes to wills, trusts, and estate and long term care planning.  To understand why, you need to know a few basic concepts.

Estate Planning

Your estate will generate tax when you pass away if the net estate exceeds a threshold estate tax exemption.  A net estate equals a decedent’s assets less debts and deductions like charitable contributions, allowable estate settlement costs, and marital deduction.  The estate tax exemption or threshold shelters from tax net estates smaller than the exemption.

While the federal estate tax threshold is greater than $5,000,000, New Jersey estate tax applies to net estates of more than $675,000.  However, the Legislature and Governor just agreed to raise New Jersey’s estate tax exemption to $2,000,000 in 2017 and eliminate the estate tax in 2018.

Nevertheless, New Jersey retains a hefty inheritance tax for many recipients of transfers at or after death other than certain non-profits, grandparents, parents, spouses, civil union or domestic partners, step children, and descendants.  Inheritance tax rates and exemptions vary depending on the amount of a gratuitous transfer at death and the relationship of the recipient to the decedent.

As New Jersey inheritance tax rates can be as high as 16%, we at FriedmanLaw work hard to help our estate planning clients minimize or avoid inheritance tax.  We do so by drafting wills that include disclaimer trusts and other tax planning provisions, and counseling clients on gift planning and other options.  However, it is important to take into account the impact of inheritance tax and other estate planning on future capital gains.

Because capital gain tax rates far exceed inheritance tax rates, faulty inheritance tax planning actually can increase over all taxes.  Thus, sometimes it is better to pay a modest inheritance tax now to minimize future capital gain tax.

New York doesn’t have an inheritance tax, but its estate tax is far more complex than New Jersey’s.  New York’s estate tax exemption will rise to $5,250,000 in spring 2017 but only for estates that don’t exceed the exemption.  The $5,250,000 exemption quickly phases out so that many estates that exceed the $5,250,000 threshold by a modest amount will get little or no exemption and instead will face a large New York estate tax bill.  Thus, New York estate tax planning can yield astronomical savings (even after taking account of legal fees and other planning costs).

Many couples have simple estate plans that leave everything to the surviving spouse.  While that may be appropriate for modest estates, it can cause wealthier couples to incur otherwise avoidable tax.  Therefore, FriedmanLaw typically employs various more sophisticated estate planning techniques to minimize our clients’ tax exposures.  In many cases, sophisticated estate planning can save substantial tax with little or no down side.

Long Term Care Planning

Long term care can cost well over $100,000 per year.  That’s a lot of money so it’s worth taking some simple steps now that may save substantial amounts later.

In many cases, this involves qualifying for Medicaid.  Medicare pays for up to 100 days of rehabilitation (with co-payments after 20 days), but doesn’t fund long term care costs like assisted living, nursing home, and home health aide chronic care.  Thus, Medicaid often is essential.

Various techniques that are both lawful and ethical are available to shelter some savings when seeking Medicaid.  These range from gifts to annuity planning and even home improvements or purchases.  In depth discussion is beyond the scope of a blog post, but FriedmanLaw can develop detailed advice based on your particular circumstances.

An important point is that the sooner you start, the more you potentially can protect and sometimes waiting can foreclose planning opportunities.  For instance, some trusts can be created only while under age 65.  New wills and powers of attorney often are needed to maximize savings but they can be adopted only while competent.  Thus, it pays to start sooner than later.

At FriedmanLaw, we look forward to guiding you through the estate/inheritance and long term care planning mazes.  First and foremost, we try to meet your realistic goals.  Typically, we will discuss your circumstances with you and then develop detailed options based on your situation.  We understand that tax planning is important but it must be compatible with your overall goals.  Finally, we will work with you to help you reach your realistic goals.  We hope to hear from you.

As this website provides general information and isn’t tailored to your particular situation, it doesn’t constitute legal advice and may not take into account rules and exceptions that affect you. Although updated from time to time, this website may not take account of recent legal developments or differences in laws from state to state. For safety sake, obtain individual legal advice before you act! You assume all risk of acting on information contained in this website. This website doesn’t constitute legal advice, and no attorney-client relationship exists unless FriedmanLaw and you execute a written engagement agreement. Please contact us at 908-704-1900 to discuss engaging FriedmanLaw to help resolve your legal concerns.
Homepage photo: Cows grazing at Meadowbrook Farm, Bernardsville, NJ by Siddharth Mallya. October 23, 2012.
Interior photo: Somerset hills pastoral scene by Lawrence Friedman.