Biden Tax Plan Begins to Take Shape – Part 2
In my post last week, I reviewed what we know so far about President Biden’s proposed tax law changes. One change would increase the tax rate on capital gains, which currently is taxed at a lower rate than regular income. Another change relates to the provision that wipes out the capital gains tax for assets that are passed at death. This provision is what is known as the “step up in basis”. It has saved many Americans who have inherited assets, hundreds of thousands of dollars or more. Here’s how it works. Normally, if I buy a stock for $1 and sell it for $10, I must pay tax on the $9 of gain. If I hold the stock, however, till I die and my children inherit it, the basis becomes what it was worth when I died. This allows my heirs to avoid tax on the gains during my lifetime. In my example, I would only owe tax on any gain above $10. President Biden plans to restrict but not entirely eliminate the step up in basis. The first $1,000,000 of capital gains would be eligible for the step up in basis, thus exempting the tax on gain up to that limit. A married couple would be able to each exclude $1,000,000. Additionally, if
Biden Tax Plan Begins to Take Shape – Part 1
President Biden in his speech to Congress last week gave us some details on the tax bill he will attempt to get passed. While it’s very early in the process, and what ultimately becomes law often varies greatly thru the back and forth negotiation process in Congress, let’s take a look at how some of these changes might or might not affect our clients. Biden talked about raising the capital gains tax rate. Currently, capital gains is taxed at a lower rate than regular income. Right now top rate for capital gains is 20% vs. 37% for regular income. The President proposes to raise the top rate back to 39.6%, which is what it was before the last tax law changes in 2017. Capital gains would then be taxed at the same rate as other income, however, this would only apply to individuals with income of $1,000,000 or more. This change would only affect the very wealthy. Additionally, most retirees drop to a lower tax bracket once they retire, drawing their income mostly from Social Security, pension and interest and dividends. The income threshold of $1,000,000 is certainly high enough that if you are reader of this blog, it is very likely that this provision wouldn’t affect you or your
Don’t Forget About the Elective Share – Part 2
Last week I wrote about Jim’s call to our office. His dad died leaving everything to Jim, including the task of taking care of his mom who had been living at home needing nursing home level care. Jim had found a nursing facility who would take her in. It would cost him $100,000 in care after which he would apply for Medicaid. That was his plan - or so he thought. I explained to him that he would have to pay more than that because of something called the elective share, which provides protection for a surviving spouse who is left nothing by his or her deceased spouse. In New Jersey, the value of the elective share is 1/3 of the deceased spouse’s estate less what the surviving spouse already has. The reason this is relevant is because when Jim files the Medicaid application, the State will treat any failure to assert a legal right to the elective share by his mom as if she gave that money away - what Medicaid considers a transfer for less than fair value. It would then assess a Medicaid penalty or waiting period for benefits. I told Jim that we needed to determine if the elective share is greater than the $100,000
Don’t Forget About the Elective Share
Jim’s dad had recently died leaving him to care for his mom. His dad knew that Jim would need to place his mom in a facility. She could not longer be cared for at home. He wanted to provide for that care but he also wanted to leave Jim an inheritance. Dad went to an attorney to update his will. He left his entire estate to Jim, thinking that Jim would be able to pay for what Mom needed but also be able to qualify for Medicaid. One thing he forgot about is something called the elective share which I’ve written about previously in this blog. The elective share is a statute that provides a surviving spouse with a minimum amount of a deceased spouse’s estate even if, as in Jim’s dad’s case, he leaves nothing to his spouse. In New Jersey the elective share is one third of the deceased spouse’s augmented estate less what the surviving spouse already has. Jim’s mom has nothing to her name. Everything was transferred to his dad’s name. This means that his mom is entitled to one third of his dad’s estate. Jim told me he had negotiated to pay a nursing facility for 8 months and then apply for Medicaid. He estimated this to be about $100,000. I asked him how much his
Aging Seniors Who Own Real Estate
So often when we receive a call from a child of an aging parent in crisis, it’s about the signs of declining mental and physical capabilities leading to the discovery of a financial crisis. This decline in health and cognition usually means a decline in the ability to manage assets such as keeping track of finances and investments, paying the bills and susceptibility to fraud. While some seniors have help such as trusted financial advisors and professional money managers, many do not and have done well with their “do it yourself” approach. This becomes a problem, however, when the senior starts to slip cognitively and loses his or her way. The discovery by family members that everything is not OK can be jarring and we have seen situations where it has come after much of the nest egg has been lost. This can be especially challenging in the case where the parent’s investments are in real estate. Because real estate is not a passive investment, it must be actively managed. Property managers can be hired to assist but we see more often than not that our clients manage their properties themselves. In the case of rental properties, whether they be commercial or residential, keeping track of leases, real estate taxes, insurance, utilities, maintenance and repairs and keeping the properties as
Another Word About QITs – Part 4
In my February 22 post I wrote about QITs and specifically about a case involving an application being denied because the QIT was improperly funded. In that case my client established the QIT just before the pandemic and funded the QIT correctly in the first month but not in the several months after that. We appealed the denial and the court last week issued its decision. QITs are used when an applicant’s monthly income exceeds the income cap ($2382 in 2021). Without it’s proper use the application will be denied. Since the income, from Social Security and pension, cannot be reduced, using the QIT is the only way an applicant will be approved. The State has imposed specific restrictions with regard to using the QIT. As I previously explained, enough income must be passed thru the QIT such that the remaining income (that is not deposited into the QIT) is below the income cap. Additionally, one cannot split income from one source to drop below the income limit. For example, if an applicant has total income of $3000 per month of which $1500 is Social Security, he or she can’t split the Social Security by putting $500 into the QIT which would drop the remaining income below the income