Happy New Year!  Some of you may wonder how much you can give this year without having to file a gift tax return and whether you need to do some estate tax planning.  Here are the key figures to keep in mind for 2015:

Estate Tax Exclusion.     This year, the federal estate tax exclusion is $5,430,000.  Thus, if an estate is worth less than that amount, no federal estate tax will be due.  The estate tax rate is 40% of the amount above estate tax exclusion.  Each spouse has his or her own estate tax exemption and can use a predeceased spouse’s unused estate tax exemption.  This principle is known as the “portability of unused exemption between spouses.”  With portability, couples can now have assets of $10,860,000 without owing any federal estate tax.  A surviving spouse who remarries will lose the prior deceased spouse’s exemption. 

The Connecticut estate tax exclusion remains at $2,000,000.  If an estate is worth less than that amount, no Connecticut estate tax will be due.  The estate tax rate ranges from 7% to 12% depending on the amount above the Connecticut estate tax exclusion.  Like the federal estate tax, each spouse has his or her own estate tax exemption.  Unlike the federal estate tax, however, there is no portability in Connecticut.  The only way for a couple to use their entire $4,000,000 estate tax exclusion is by having a credit shelter trust.

Gift Tax Exclusion.     The annual federal gift tax exclusion is $14,000 for 2015. If a person makes gifts of $14,000 each to 4 different individuals, none of the gifts are considered taxable and none of them have to be reported on Form 709, the federal gift tax return.  In 2015, a taxpayer can split gifts with his or her spouse so that $28,000 can be given to each donee.   A taxpayer, however, must report split gifts on Form 709.  The annual exclusion for gifts to non-citizen spouses is not the same as the annual exclusion for gifts to U.S. citizen spouses.  That is because gifts to non-citizen spouses can be subject to federal gift tax.  Gifts to citizen spouses are not subject to gift tax because of the unlimited gift tax marital deduction.  The annual exclusion for gifts to non-citizen spouses in 2015 is $147,000.

Besides the annual exclusion, each taxpayer also has a lifetime gift tax exclusion.  In 2014, the lifetime gift tax exclusion is $5,430,000.  By applying some of your lifetime gift tax exclusion, a gift with a value in excess of the $14,000 annual exclusion will result in no gift tax owed, but you must file a Form 709 with the IRS.  When you die, your estate tax exclusion will be reduced by the amount of the gift over the annual exclusion.  The lifetime gift tax exclusion is the same for U.S. resident non-citizens and U.S. citizens.  The federal gift tax rate is 40% for the amount above the lifetime gift tax exclusion.

In 2015, the Connecticut lifetime gift tax exclusion is $2,000,000.  Connecticut and the U.S. government have the same annual gift tax exclusion of $14,000.   You have to file a Connecticut gift tax return if you make any taxable gifts.   For example, if you are not married, and you give $50,000 to each of your 2 children, you will have to file a Connecticut gift tax return, even though no gift tax is payable.

Federal and Connecticut gift tax returns are due by April 15 of the year following the gift.

On December 12, 2014, The Centers for Medicare and Medicaid Services (CMS) proposed a regulatory change to ensure that legally married same-sex spouses receive the same rights as opposite-sex spouses in Medicare and Medicaid participating facilities.  These rules apply regardless of whether the state where the facility is located recognizes same-sex marriages. CMS is a federal agency within the United States Department of Health and Human Services. It is responsible for administering the Medicare program and, in partnership with state governments, the Medicaid program.

The new rule would apply to long-term care facilities, hospices, hospitals, ambulatory surgical centers and other health care providers. If the new rules become final, health care facilities and providers would have to recognize all valid same-sex marriages, regardless of whether the state in which the health care facility or provider is located recognizes same-sex marriages.

The new rule was drafted in response to the U.S. Supreme Court’s ruling in United States v. Windsor, 570 U.S.12, 133 S.Ct. 2675 (2013).  That decision declared the federal Defense of Marriage Act (DOMA) unconstitutional. DOMA defined “marriage” and “spouse” to exclude same-sex partners, stating:

In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word “marriage” means only a legal union between one man and one woman as husband and wife, and the word “spouse” refers only to a person of the opposite sex who is a husband or a wife.

In the Windsor case, New York residents Edith Windsor and Thea Spyer, wed in Ontario, Canada, in 2007. The State of New York recognizes that marriage. When Spyer died in 2009, she left her entire estate to Windsor. Windsor then sought to claim the federal estate tax exemption for surviving spouses, but was barred from doing so by DOMA. The U.S. Supreme Court held that DOMA is unconstitutional as a deprivation of the equal liberty of persons that is protected by the Fifth Amendment.

The proposed rule was published in the December 12, 2014, Federal Register, and can be viewed here: https://www.federalregister.gov/articles/2014/12/12/2014-28268/medicare-and-medicaid-program-revisions-to-certain-patients-rights-conditions-of-participation-and.

The nation's elderly and disabled Social Security recipients will receive a 1.7 percent increase in payments in 2015. This increase will raise the average monthly payment for the typical retired worker by $22. The increase is slightly higher than last year’s 1.5 percent cost-of-living adjustment (COLA). The same COLA will apply to pensions for federal government retirees and to most veterans.

The standard Medicare Part B monthly premium will remain $104.90 in 2015, the same as it was in 2014.  Most Medicare recipients have their premiums deducted from their Social Security payments.   

The COLA by the Numbers

Starting in January 2015, the average monthly Social Security retirement payment will rise from $1,306 to $1,328 a month for individuals and from $2,140 to $2,176 for couples. The 1.7 percent increase will apply to both elderly and disabled Social Security recipients, and individuals who receive both disability and retirement Social Security will see increases in both types of benefits.  The maximum Social Security benefit for a worker retiring at full retirement age, which is age 66 for those born between 1943 and 1954, will be $2,663 a month.

The Social Security COLA also raises the maximum amount of earnings subject to Social Security taxation to $118,500 from $117,000.  This means that those earning incomes above $118,500 will pay no tax on any income above that threshold.

The COLA increases the amount early retirees can earn without seeing a cut in their Social Security checks.  Although there is no limit on outside earnings beginning the month an individual attains full retirement age, those who choose to begin receiving Social Security benefits before their full retirement age may have their benefits reduced, depending on how much other income they earn.

Early beneficiaries who will reach their full retirement age after 2015 may now earn $15,720 a year before Social Security payments are reduced by $1 for every $2 earned above the limit. Those early beneficiaries who will attain their full retirement age in 2015 will have their benefits reduced $1 for every $3 earned if their income exceeds $41,880 in the months prior to the month they reach their full retirement age.

For 2015, the monthly federal Supplemental Security Income (SSI) payment standard will be $733 for an individual and $1,100 for a couple.

For a complete list of the 2015 Social Security changes, go to: http://www.ssa.gov/news/press/factsheets/colafacts2015.html 

Transferring money to a child can cause a penalty period for a Medicaid applicant if done within the five years prior to the application.  One exception to this rule is a transfer in exchange for fair market value of services.  This exception allows a parent to pay a child for taking care of him or her. 

You may ask “Don’t family members care for each other without expectation of compensation?”  The answer is yes, in most instances, and the law presumes that a child is rendering services for a parent gratuitously.  So how can one overcome this presumption?  The arrangement must be documented in a Caregiver Agreement. The Department of Social Services (“DSS”), the Connecticut agency that administers the state’s Medicaid program, recognizes payment under a Caregiver Agreement as a legitimate expense.  If there is no written contract, DSS may consider such payment a disqualifying gift.

For many people, a Caregiver contract with a parent feels awkward.  I typically hear “My mother raised and cared for me and now it is my turn to care for her.  I shouldn’t turn the care of my mother into a business arrangement”.  This sentiment is understandable.  However, many children who care for parents sacrifice time away from a job and forego earning income they need to support themselves and their own children.  Moreover, the mother would likely need a nursing home if the child did not take care of her.  Additionally, many parents can’t afford the full cost of paying for a stranger to provide homecare.  Finally, many parents would prefer to pay a child and keep the money in the family rather than pay a stranger or nursing home.  In these circumstances, a Caregiver Agreement between the child and the parent makes perfect sense.

A written Caregiver Agreement must contain all of the necessary elements of a binding contract in order to satisfy DSS.  The agreement should set forth the full scope of services and compensation to be provided.  Moreover, it should include all of the family members who are providing any type of compensable service to the parent.  Such services could include paying bills, grocery shopping, transporting the parent to medical appointments or recreational activities, providing companionship, cooking meals, house cleaning, yard work, and doing laundry.  The agreement can specify that the payments are made weekly, monthly, or in a lump sum upon request from the service provider.  If the child is uncomfortable accepting the payments, the child could collect the compensation, then set up a bank account in the child’s name and use the money as a nest egg for the parent’s benefit.  The lump sum method provides the child the option of declining to accept payment if the parent never needs to apply for Medicaid.  If the parent applies for Medicaid, the child can request the lump sum payment and reduce the parent’s countable assets and expedite the parent’s eligibility.  Regardless of the method used, the caregiver should keep good records of all services provided to justify the payments.    

Contact us if you would like to discuss in more detail how a Caregiver Agreement can benefit you and your family.

If your spouse receives a diagnosis from a doctor that she or he has dementia or Alzheimer’s Disease, it is time to consider changing your estate plan.  Why? Because if you die and your spouse needs Title 19 (Medicaid), your family could lose most of its wealth.

Let’s take an example.  Assume you and your wife have a joint investment portfolio of $300,000 and together you own a home without a mortgage.  You have a pension from work.  You have a $100,000 life insurance policy naming your wife as beneficiary. Your current Will leaves everything to your wife and together you own most of your property jointly.

One day, you accompany your wife to the doctor and the doctor informs you that your wife has early onset of dementia.   In the middle of the night you start thinking, “Who will take care of my wife if I am gone?”  Your mind immediately thinks that your children will help.  But then you recall they have their own lives.  You decide that you must set things up so it is easier for them to help your wife after you are gone. 

You set an appointment with your lawyer and ask questions about Title 19 and Medicaid.  Your lawyer tells you that after you die your wife can only have $1,600 in assets if she needs to qualify for Title 19.  Given the average cost of nursing home care in Connecticut is $11,851 per month, after you die your wife may have to spend down all of the family’s funds on her medical care to qualify for Medicaid. 

There is a better way to set up your estate plan.   We recommend that you no longer hold your property jointly and you do not name your wife as beneficiary of your life insurance policy.  Instead, all of your joint assets are retitled in your name.  Your wife signs a deed conveying the home to you.  You meet with your financial advisor to put your investment portfolio in your name.  You talk to your insurance agent to change the beneficiary to your estate, instead of your wife. Your pension will continue to provide some support to your wife after you are gone.

You sign a Will that does not give everything to your wife.  Instead, the Will states that ½ of your property goes to an income-only trust for your wife and the other ½ goes to a trust for the benefit of your descendants (i.e. – your children and the children of a deceased child). We call it a Community Spouse Will. You name your most trusted child as Executor of your Will and Trustee of the trust for your descendants under the Will. If the trust for your wife does not provide enough funds for her living expenses, then the Trustee of the trust for your descendants can distribute those funds to your children and they can tap those funds for her care.  When your wife passes away, any balance remaining in her trust goes to your descendants.  Any balance left in the trust for descendants will go to your children. 

What does a Community Spouse Will accomplish?  If you pass away, your wife will qualify for Title 19 (Medicaid) because she does not own any property and your most trusted child will manage your property for the family’s benefit.  You will rest assured that your wife can receive the care she needs and leave something for your children.