How Death Taxes Get Paid – Part 2
In this week’s blog post I continue discussing death taxes and how they get paid. Last week I explained how estate taxes and inheritance taxes are calculated. In each case the assets subject to the tax are not necessarily all within the control of the executor/administrator of the estate. That’s because non-probate assets which go directly to named beneficiaries or surviving co-owners are not part of the probate estate that passes by way of the will. Yet the executor/administrator is the person tasked with the responsibility to file the return and pay the tax. That can be a problem if there are not sufficient assets in the probate estate. Let’s look at an example of how this might play out. John Doe did not have any children and his wife predeceased him. His will left his assets to several nieces, nephews and friends. What he did, however, was designate TOD/POD (transfer on death/payable on death) designations for some of his assets. John had a large non-retirement brokerage account that he made TOD to a niece and nephew. He also left his home to a friend by way of a specific bequest in his will. The brokerage account was valued at $800,000 and the home at $1,000,000. He also had some smaller retirement accounts
How Death Taxes Get Paid – Part 1
In this week’s blog post, I address death taxes - the taxes owed as a result of one’s passing - but more specifically how to pay them. It is not always as straightforward as one might think. First, let’s be clear what we are talking about. In New Jersey, we need to be concerned with estate taxe and inheritance tax. Estate tax is based on the size of the decedent’s (the person who died) estate. A certain amount - referred to as the “exemption amount” is not subject to the tax. There is a federal estate tax and there was a New Jersey estate which was phased out for anyone who has passed away January 1, 2018 or later. The federal estate tax exemption is now $15,000,000, meaning the tax is owed on estates greater than that amount with one exception. Amounts left to a surviving spouse are never subject to federal estate tax even if they exceed $15,000,000. This amount is currently indexed for inflation so will increase each year. While New Jersey no longer has an estate tax, it still has an inheritance tax. This tax is based on the relationship of the heirs to the decedent. Class A beneficiaries are exempt from the tax. These heirs are children, grandchildren, parents,
Medicaid Redeterminations Revisited – Part 3
In my blog post last week about Medicaid redeterminations, I wrote about the reasons why Medicaid conducts annual redeterminations. Recent changes in the written application, however, has caused some confusion. As I explained last week, the application has more than doubled in length. The new “redet” application now looks more like the application filed to get Medicaid approved. It asks for much of the same information. The section about resources (assets) asks for a listing of every account opened or closed in the past 5 years. It also asks for listing of all real estate owned or sold in the past 5 years. 4 or those 5 years have already been answered in previous annual redet applications and/or the original application. The question should be limited to the past year but it is not. Section 6 of the new application asks about transfers made in the last 5 years. Again, this has already been asked and answered in previous redets or during the original application process. The concern is that if we answer the question as asked and include transfers which had previously been disclosed, will a new transfer penalty be mistakenly calculated? That will lead to more wrongful denials or improper penalties. It is not clear why these changes were made but what
Medicaid Redeterminations Revisited – Part 2
In my blog post last week, I wrote about changes in Medicaid’s redetermination process, especially in the last 6 to 7 years. More recently, in the last 6 to 7 months, Medicaid has changed the redetermination application itself. Before the change, the “redet” application was 7 pages. Now it is more than double that, at 15 pages. More important, however, is what is being asked on this new application. Many of the questions being asked are identical to the original application. In other words, to many it looks like the redet app is an entirely new application process with a new 5 year look back - except that it’s not supposed to be that way. There are two primary reasons for the redetermination application process. One is to be certain that the Medicaid recipient still meets the resource eligibility standard of having no more than $2000 of assets. What would have changed in a year, you may ask? A Medicaid recipient may have received an inheritance from a family member, a settlement of a lawsuit or may now be divorced. That’s why on the old redetermination application there was a question asking about changes in the past year. On the new application, however, that question has been removed. The second purpose for the redetermination is
Medicaid Redeterminations Revisited – Part 1
There are many misconceptions about Medicaid and the application process. One of them is that after Medicaid is approved, ”we are home free”, so to speak, meaning no more worries about the eligibility requirements. Unfortunately, not true. As I often tell new clients and their families, we first must focus on meeting all of Medicaid’s financial and medical eligibility requirements before applying for benefits. Once Medicaid is approved, “I will then tell you how not to lose Medicaid benefits”. That’s because Medicaid conducts an annual redetermination process. Over the years, this process has changed. Back when I filed my first Medicaid applications in the 1990’s, redeterminations were sporadic. They were not conducted annually and some counties (Medicaid applications are filed with the board of social services of the county where the applicant resides) never seemed to conduct them at all. That changed maybe 6 or 7 years ago. Now all the counties routinely send annual notices and redetermination applications. While the redetermination process is much easier than the application process, problems do exist, some of which I have written about in the past. For example, despite my office having filed the original application, I tell families that when it comes to getting the redetermination notice, it may be sent to us,
A Capital Gains Tax Mistake (Part 3)
In my blog post last week, I was explaining the large and unexpected capital gains tax a client faced. I explained that capital gains is paid on an asset that has appreciated when it is sold. In my client’s case, he had sold real estate that his mother had given him after his father died. When he filed his income tax return for the year he sold it, his CPA told him he had a large six figure tax to pay. The amount surprised him but that’s because no one explained to him (or his mom) before the transfer how capital gains tax works. Had they gotten that advice, they could have avoided or minimized the tax. What they missed was something called a stepped up basis. As I wrote last week, normally the capital gains is taxed on the difference between the sale price and the basis, which is the purchase price. (In the case of real estate, capital improvements made during the course of ownership can raise that basis.) Had the property been inherited by my client, rather than gifted by his mother during her lifetime, he would have received a stepped up basis to the value of the property when his mother died. This “reset” basis could