5. I have a living will so I’m covered if I can no longer make my own healthcare decisions.
The truth is that a living will is just one component of a good plan. A living will is a set of instructions that governs end-of-life decision making. In order for a living will to take effect, the patient’s attending physician must determine that the patient is incompetent and either permanently unconscious or suffering from an end-stage medical condition.
A living will does not allow the patient’s chosen agent to act in other circumstances. In other words, if a patient is merely incompetent a living will is not operative and therefore the agent specified in the document is not necessarily the patient’s decision maker.
A healthcare power of attorney is a more complete document that allows the client to choose who they want to be their agent to make healthcare related decisions in the event of their incapacity. These documents also often include living will language.
4. I can give away $13,000 (or $10,000, or $14,000) a year.
This myth is partially based in fact. In reality, depending on the circumstances you may be able to give away everything that you own. It is yours, after all!
Usually, however, clients are referring to the amount of money they can give away without causing a transfer of assets penalty in the event that they need nursing home care and apply for Medical Assistance. Herein lies the problem.
Often, clients are confusing two different and distinct bodies of law. One is the federal estate and gift tax system. The truth in this matter is that there is a certain amount that an individual can give away to another person per year without having to file a gift tax return with the Internal Revenue Service (IRS). In 2014, this amount is $14,000.
Most people can give away much more than $14,000 a year per person without actually having to pay a gift tax to the IRS. Each individual has a large federal estate tax exemption – $5.34 million dollars in 2014. When a person makes gifts that exceed $14,000 per year per person and they have to file a gift tax return, the amount of their exemption is reduced.
The moral of the story on gifting for federal estate and gift tax purposes is that most people can give any amount of money they have away and not owe taxes. They will, however, have to file a gift tax return to report large gifts to the IRS.
Gifting rules for the Medical Assistance program are a completely different animal. When an individual needs nursing home care and applies for Medical Assistance to cover their cost of care, they must fill out an application. In order to be eligible, they must be below a certain asset threshold. To avoid situations where relatively well-off individuals give all of their assets away in order to become eligible for Medical Assistance, there is a five (5) year look-back period on gifts made by the applicant or his or her spouse.
When the individual applies for Medical Assistance, they must disclose all of the gifts they have made that exceed $500 per month (in the aggregate – all gifts in that month included) over the course of the previous five years. Individuals who have made gifts may be assessed a penalty period where they are ineligible to receive Medical Assistance long-term care benefits. The penalty period could be days, weeks, months, or years depending on the amount of assets given away.
Therefore, the answer to this question really depends on the circumstances at hand. For federal estate and gift tax purposes the rules are much different than they are for Medical Assistance applications.
3. I need a revocable living trust so I can avoid probate. Probate is a pain and it is costly.
While probate can be a pain, in Pennsylvania it’s generally not that bad and it’s generally not that costly. Sure, there are fees involved. Many of the same fees apply to trust administration, however.
In other states, the rules are different. Probate may be a costly, burdensome process. There are perfectly good reasons to create revocable living trusts but in Pennsylvania avoiding probate is generally not one of them.
2. My children will barely inherit anything from me because of tax liability.
This statement is a flat out myth. Often, clients are confused about how their estate will be taxed when they pass away. Again, it is common that clients confuse the federal estate tax with another body of law – Pennsylvania inheritance tax.
The truth here is often a relief. Most clients do not have large enough estates to be subject to paying federal estate tax. As mentioned previously, there is a $5.35 million exemption per individual on estate and gift taxes.
Pennsylvania does impose its own inheritance tax. The inheritance tax rate is much lower than the federal estate tax rate. Transfers to spouses are taxed at a 0% rate. Transfers to children are taxed at a 4.5% rate. Transfers to siblings are taxed at a 12% rate and transfers to everyone else who is subject to taxation is at a 15% rate.
Inheritance tax is generally not the big shark in the estate planning pool. The risk of assets being depleted due to payment for long-term care services is usually much more threatening.
1. I have a power of attorney, so my agent will be able to protect my assets in the event that I need nursing home care.
This is a phrase I repeat constantly: “all financial powers of attorney are not created equal.” It’s true!
Depending on the language in a financial power of attorney, an elder law attorney may be able to help protect a significant portion of a client’s assets if they need nursing home care. Every case is different, but in a good number of cases the most effective planning requires a well-drafted power of attorney that gives the client’s agent the power they need to protect assets.
The law in Pennsylvania is very clear about what provisions the document needs to contain in order to allow an agent to have this flexibility. Quite often, clients come to meet with me and have documents which do not have the necessary provisions. In some cases, based on the client’s goals, this is alright. In the truly heartbreaking cases where assets could be protected but the client is now incapable of signing a new document with the right provisions, it can be disastrous.
No two estate plans are completely alike. When we meet with clients we take the time to talk with them about their goals and help guide them so their goals can be met. Engaging in this process is not only important in the event that a crisis may occur in the future, but it also can provide peace of mind in the present.
If you’ve been considering doing some planning or having your existing plan reviewed, remember that delay can impede the most effective planning techniques. It’s a new year! What are you waiting for?