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Last month I started a discussion about how to protect our assets so we actually have something to pass to our heirs upon our death. I mainly talked about how the government tries to reduce our estate by way of taxes. This month the discussion moves to the cost of long term care, and how to minimize that cost.

As previously stated, the cost of care in New York can run anywhere from $6,000 per month for home care to over $15,000 per month for nursing home care. That’s a lot of money to go through! Doing the math, that’s over $180,000 per year. With the average stay in a facility being two and a half years, the cost could climb to a half a million dollars when all is said and done.

So how do we stop that from happening? Keep in mind that the government has a very simple way of looking at this. If you have assets and need care, you need to spend your assets first. When you run out, then the government will take over in the form of Medicaid. In New York, “running out” means having less than $14,500 to your name. That includes savings, checking, money market, cds, stocks, bonds, brokerage accounts, etc. It even includes the cash value in any life insurance and (with some exceptions) your home. Basically, if it’s got your name on it, you need to spend it first.

That means that in order to protect some assets, we need to get them out of your name. This now becomes a balancing act of which assets and how much. And, more importantly, to whom do we give those assets? I have found over the years that this becomes a very personal decision and depends on the comfort level of the individual. Some people feel that they need very little while others like to have much more around “just in case.” It also depends on your income and how much of the assets are needed to live.

Just be aware (without going into all the rules and regulations of Medicaid) that the transfer of assets will cause a period of ineligibility for Medicaid for up to five years. This penalty begins when you first need the medical assistance, so if you do make a transfer you need to be able and willing to wait 60 months before you can apply for the government assistance.

Getting back to what assets to transfer, in most cases the easiest answer is to move the house. This is usually the single most valuable asset. When I first started doing this back in the ‘90s, this meant simply doing a deed transferring the property to the kids.

Between changes to the laws over the years and us attorneys getting smarter, this is probably no longer the way to go. First, there are multiple tax issues. Since the kids own the house but don’t live there, they will pay a very large capital gain tax when the house is sold. It doesn’t matter whether it’s before or after your death. There’s also the loss of all your STAR exemptions.

Second, and I think the bigger problem, is the fact that your children now own your house! Hopefully they’re not the kind of kids that would then throw you out, but legally they could. Or relegate you to living in the basement. More to the point, what happens to your house if something happens to one of your kids? What if your daughter begins having creditor problems, or gets involved in a car accident and is being sued? What happens to your house if she decides to get divorced? Like it or not, your house gets thrown into the mix.

Or worse, what happens if your son dies before you? Now, according to his estate plan, your daughter-in-law owns your house; or your grandchildren own it – probably not what you were expecting to happen at this time of your life.

To avoid some of these unforeseen consequences, when transferring the property, you could retain a Life Estate. This would at least give you the legal right to live in the house exclusive of anybody else. It would also allow you to keep your STAR exemptions. If the property wasn’t sold until after you died, the Life Estate also eliminates the capital gain tax issue. If it was sold before that, there would still be a large tax problem, but not quite as bad. But, the biggest problem (in my eyes) is that your children would still own your house and it would still be subject to their ills and wills.

One solution? An irrevocable trust for Medicaid qualifying purposes. I have to specify it that way because there are all sorts of irrevocable trusts. Many of them are for tax purposes or for insurance purposes. These do not always help in terms of protecting your house (or any other asset you may put into the trust) from the cost of long term care.

This trust can be tailor made to fit the individual needs of the client. Done correctly, it will provide a life estate for you allowing you all of your tax benefits. More importantly, the trust “owns” your house or any other asset you may put into the trust. Your children won’t own it until after you die. I could spend another hour talking about this trust, but for more details, you should speak to a qualified Elder Law attorney.

Over the course of my career, I’ve found that there are really two parts to being an estate planning attorney. The first part is to actually create and execute a plan for my clients. The plan usually consists of a Will or a trust, along with a Power of Attorney, Health Care Proxy and Living Will. This is to ensure that whatever is in your estate gets to pass to who you want, when you want and who gets to control this passing of assets.

The second part is what’s commonly referred to as asset protection. This simply means making sure that your estate plan actually has assets to pass. Otherwise it’s an exercise in futility.

But who are we protecting our assets from? There are two main entities that are trying to greatly reduce our estate. The first is the government in the form of taxes. The other is the cost of long term care. The latter, in New York, can cost anywhere from $6,000 per month for home care to $15,000 per month for nursing care.

This month I’m going to concentrate on discussing (and ways of reducing) various taxes and next month I’ll discuss how to protect at least some of our assets from the high cost of care.

The potentially biggest type of tax on our assets is estate tax. There is both federal and New York estate tax. With the federal tax, it’s actually what they call a uniform gift and estate tax and currently has a $5,340,000 exemption. The exemption amount goes up every year as it is indexed for inflation. This means that there is no tax for the first $5 million, whether you give it away over the course of your lifetime or upon your death. But the tax cranks to 40% very quickly after that. There is also this thing that has been dubbed “portability” between spouses. Simply put, whatever the first spouse hasn’t used of his or her exemption can be “ported” over to the surviving spouse. So the surviving spouse could therefore, potentially have up to a $10 million exemption.

Prior to April 1, 2014, New York had a $1 million dollar exemption before any estate tax kicked in. As I’m sure many of you have heard, Governor Cuomo has changed all of that. Now, if you died after that date, your exemption doubled to $2,062,500 and an additional $1,062,500 is being added each year until 2017 when it gets to $5,025,000. After that New York should then match the federal exemption. This is great news if you are only “upper middle class” as you should now be exempt.

But, like so many other areas in New York, this is another buyer beware. The problem comes in when you exceed the exemption. After that you rapidly lose the exemption. And if you have over 105% of the exempted amount, you lose the entire exemption with a maximum tax rate of 16%. As an example, if you die this year with $2,062,500 you pay no New York estate tax. But if you die with $2,100,000, you will now pay over $49,000 in taxes. Under the old tax laws you would only pay about $18,000. As the exemption grows over the next few years, that loss of the exemption becomes even more Draconian.

So, how can we reduce this tax? Remember portability with the federal tax? Not so with New York estate tax. So, if you have a spouse, it becomes even more imperative to set up some type of credit shelter trust within your Wills or trusts. This will allow you to take advantage of both spouses’ exemptions. I prefer using disclaimers as this gives the surviving spouse the most flexibility.

Another way to reduce the taxes is by the use of gifting. Prior to April 2014, New York had no gift tax. So if you gave away assets prior to your death, you only had to worry about the federal estate tax. Technically New York still doesn’t. But now they have what they call an “add-back” provision. Between April 1, 2014 and January 1, 2019, any asset that you’ve gifted within three years of your death will be added back into your estate for tax purposes.

The options here are to either try to discount the gift or give the gift to charity. There are various ways of discounting a gift, depending on the type of asset. If you give away a $500,000 asset (say into a trust for your kids), there are ways of discounting the gift and making it look like a $200,000 gift for tax purposes. Gifting to charity may actually be less expensive than the tax. For example, as noted above, if you have $2,100,000 and die this year your estate will pay over $49,000 in taxes. But if you gift $40,000 to charity, you now are under the $2,062,500 and will have no estate tax. That’s a net savings of over $9,000.

My only advice with methods such as above is to be very careful when doing things like this. You don’t want to trade one type of tax for another. You may have just gotten rid of a 16% estate tax and now have a 20% capital gains tax. Or you may have triggered an income taxable event and all the gift may now be additional income to you or your children. I suggest that you speak to a professional when trying to protect your assets while setting up your estate plan.