Estate planning strategies and long-term care

Karin Price Mueller/The Star-Ledger writes: Question. My wife and I are in our mid-70s. Our income comes from Social Security and IRAs. The house is paid off and we both have long-term care insurance. What kind of strategies exist to help us minimize our tax liability so we can pass our wealth, approximately $2 million, to our heirs? We worry that if long-term care insurance runs out, we will have to pay from our savings and we will be unable to give anything to our kids.

— Michael K.

Answer. You’re smart to get your affairs in order while you’re healthy.

Each spouse has a $5.25 million federal exclusion amount which is exempt from federal estate and gift taxes in 2013, said Shirley Whitenack, an estate planning attorney with Schenck Price, Smith & King in Florham Park.

The exclusion amount, which is indexed for inflation each year, will increase by $90,000 in 2014, she said.

"The American Taxpayer Relief Act, passed this year, also made permanent the concept of ‘portability,’ which means that the surviving spouse can use the exemption of the unused portion of the spouse that died," she said. The exclusion amount, which rises with inflation, and the concept of portability make it unlikely that your assets will be subject to federal estate tax.

"The exclusion amount inflation increase and the concept of portability make it unlikely that this couple’s assets will be subject to a federal estate tax."

The New Jersey estate tax, however, is calculated based on a $675,000 applicable exclusion amount. So if you don’t owe federal estate taxes, you could owe taxes to the state.

Whitenack said estate planning attorneys use various tax planning techniques to minimize or eliminate the imposition of "death taxes," including marital trusts, disclaimer trusts, lifetime gifts and equalization of assets between spouses.

The private pay cost for nursing home and assisted living care is very pricey in New Jersey, so Whitenack said you should consult a financial advisor to determine whether you can increase your retirement income so that your investment income, Social Security payments and required minimum distributions from your IRAs, together with your long-term care insurance benefits, will be sufficient to pay for long-term care without the need to dip into a substantial portion of the principal.

Whitenack said there are two Medicaid programs for long-term care in New Jersey: the Medicaid Only program and the Medically Needy program.

The Medicaid Only program is only available to those individuals whose monthly gross income is below the "income cap" ($2,130 per month in 2013).

"An institutionalized individual applying for the Medicaid Only program must have countable resources that do not exceed $2,000 on the first day of the month in which eligibility is sought," she said.

The Medically Needy Medicaid program is available for those institutionalized individuals whose monthly income exceeds the Medicaid income cap of $2,130 per month. The Medically Needy program does not pay for costs of medical care outside of the nursing home, such as inpatient hospital services or care in an assisted living facility.

She said under the Deficit Reduction Act of 2005, there is a five-year "look back period" for making nonexempt transfers of assets to others. This means Medicaid eligibility can be delayed if such transfers are made within five years of applying for Medicaid.

"Since the couple’s long term care insurance will pay out for at least five years, they may want to transfer assets to their family members or to an irrevocable trust, retaining sufficient funds so that with the long-term care insurance benefit they can pay for their care during the look-back period," she said. "After five years have passed, they may be eligible for Medicaid benefits if their other assets have been spent down to the asset limit."