A qualified personal residence trust (QPRT) is an irrevocable trust used to achieve estate and gift tax savings. The basic idea behind a QPRT is to transfer the equity in a qualified residence out of a person’s estate and to their heirs while reaping lower transfer tax consequences.

A QPRT can also be used to prevent creditors from accessing equity in the residence and allow for the gradual transition of assets to other family members, should these be among a person’s concerns. Assuming specific rules are met, a QPRT can be used for a primary residence or secondary residence, such as a vacation home.

How Do Qualified Personal Residence Trusts Work?

If, after consultation with an attorney, it appears a QPRT could benefit you, it works as follows:

• You transfer the title of a residence to an irrevocable trust and retain the right to use the residence and receive any income from it for a fixed period (known as the trust term).
• If you, as the trust grantor, pass away prior to the expiration of the trust term, it is common for the residence to revert back to you (in compliance with 26 U.S. Code § 2036). The residence will then be included in your estate and will be dealt with according to the terms of your estate plan. In addition, the value of the gift will be reduced due to the reversion.
• If you, as the trust grantor, are living when the trust term comes to an end, your interest in the trust will expire, and the residence passes to those that have been designated your beneficiaries. If the trust is constructed correctly, there should be no additional transfer tax on the appreciation of the value of the residence. In addition, the property in the QPRT will avoid any complications that may come with going through the probate process.

Special QPRT Rules

A QPRT must follow specific rules to comply with limitations imposed by the IRS:

• A grantor cannot have term interests in more than two QPRTs.
• Property transferred to the QPRT must be either:
  • The grantor’s principal residence,
  • A residence that is used for personal purposes for at least 14 days of the year, or, if more than 14 days, then for 10 percent of the number of days per year that it is rented, or
  • An undivided fractional interest in one of these types of residences.
• If a grantor pays any expenses of the property that arguably should be paid for by the beneficiaries, this payment may constitute an additional taxable gift. Language can be crafted to address this issue, but it must be done with care and attention to how it is written.
• If the property in the QPRT is no longer used as a qualifying residence, the QPRT must terminate, subject to certain exceptions.
• If a QPRT ceases to qualify as a QPRT, the trust assets must go to the trust grantor, or the QPRT must be converted into a Grantor Retained Annuity Trust (GRAT) within a fairly short timeframe, often as soon as 30 days.

It should be noted that the above rules are not exhaustive. There are many other rules and technicalities that are beyond the scope of this article.

Gift Tax Benefits of QPRTs

A QPRT has unique gift tax benefits. Once set up, the trust grantor is treated as having made an immediate gift to their beneficiaries. This means that the gift tax value is calculated as of the time of the transfer of the property into the QPRT.

However, this gift is discounted by the amount of the trust grantor’s retained interest in the residence. This is usually the value of the right to use or collect income from the property. The values and discounts are determined using actuarial tables published by the IRS.

Once the trust term ends, and assuming the grantor survives the term, the residence will pass on to the beneficiaries. They will not pay any further transfer tax above any tax that may become due on the discounted gift amount. If the residence has appreciated in value during the trust term, this appreciation will not be subject to transfer tax.

If the trust grantor passes away before the expiration of the trust term and there is a reversion clause, QPRT property will be brought back into the grantor’s estate. In this scenario, the grantor will not be in any worse position than they would have been had they not created the QPRT.

You May Be Able to Stay in Your Home Longer Than You Think

Many become nervous when they learn that they may only retain an interest in a personal residence subject to a QPRT for a certain amount of time.

However, one way to continue to have access to the property even after the term ends is to provide that the residence will stay in the trust and give the person’s spouse the right to live there rent-free until they pass. As long as the grantor remains married to their spouse, there is no reason why they cannot live there as well during this time.

Some Drawbacks

QPRTs are not a perfect solution for everyone. For example, it will not be possible to mortgage the property after it is put into the trust. In addition, it may be necessary to pay off any mortgage against the property prior to the transfer to avoid complications, such as a possible mortgage acceleration or other difficulties.

Setting up a QPRT can also be an expensive endeavor, as a good amount of time and effort by qualified professionals will be required to set it up correctly. This can include attorney’s fees, several appraisals, and title expenses.

Finally, a QPRT is irrevocable and may not allow someone to engage in other gift and estate tax planning. An analysis will have to be made to determine if a QPRT makes the best use of a person’s available gift and estate tax exclusions.

Consult With Your Attorney

This article only covers some of the rules that must be followed or technical considerations that should be considered when setting up a QPRT or determining if it is the right option for your situation. It is essential to consult with your estate planning attorney before creating a QPRT.

To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

Estate planning, or legacy planning, entails preparing your affairs for the future, including death and other life events. While older adults might give more thought to estate planning, it is an essential tool at any age.

Why It’s Important

With estate planning, individuals and families can protect their interests after death or incapacity.

• You can provide for their spouses, children, and dependent family members when you pass away.
• You can arrange your care and financial affairs should you suffer a severe accident or illness that renders you incapacitated.
• If you are a parent, you can nominate a guardian to care for and manage the inheritance of your minor children.
• If you own a business, you can prepare to transfer it to family members, colleagues, or other trusted individuals.
• You can make arrangements for your long-term care when you can no longer live on your own.
• You can also make funeral preparations, determine what happens to your body when you pass, and prepay for your funeral, all of which can help lessen the burden on your family members.

What Is an Estate?

Legacy planning entails passing on your estate. Your estate is everything you own, including:

• Savings and checking accounts
• Retirement accounts
• Investments
• Life insurance
• Annuities
• House and other real estate
• Car
• Personal possessions, such as jewelry, furniture, and sentimental items

When you die, your estate encompasses all your property upon death. If you sold or gave away property before death, it is no longer part of your estate, and you cannot transfer it upon death.

Items you own with another person are also part of your estate. Depending on the type of asset, it might automatically pass to the other owner. For instance, if you own a home with your spouse as tenants by the entirety, it will pass to your spouse upon your death.

What Is an Estate Plan?

An estate plan consists of legal documents and arrangements that determine the distribution of your assets when you die or outline your care if you become incapacitated.

While a will can be a central component of an estate plan, a solid plan encompasses more than a will. It can also include legal tools that allow assets to pass outside of a will and probate, the process by which a court oversees the distribution of assets in a will.

Estate Planning Tools

In addition to your will, your estate plan could include the following:

• Purchasing jointly owned property or adding a joint owner to your property
• Designating a beneficiary on a pay-on-death bank account, retirement account, or annuity
• Buying life insurance to benefit your family should you pass away
• Creating a trust for a child
• Obtaining long-term care insurance to cover future nursing home or assisted living fees
• Executing power of attorney documents, naming health care and financial agents
• Making a living will, providing instructions for care should you become incapacitated
• Preparing a transfer on death instrument to pass ownership of your property to a beneficiary upon death

What Is an Estate Planner?

As professionals helping people make future arrangements, estate planners are attorneys who focus on end-of-life preparations. Estate planning attorneys assist people with drafting legal documents and understanding laws and taxes that could affect them and the loved ones they will leave behind.

When creating estate plans, individuals may need to consult attorneys as well as other experts, including financial planners, accountants, life insurance advisors, bankers, and real estate brokers.

What Does the Final Distribution of Assets Involve?

The final distribution of assets is a conclusory step in the probate process before the court closes probate. When an estate goes through probate, the personal representative must satisfy all debts, and the court must resolve all disputes before allowing the beneficiaries to receive the assets. The court transfers ownership of the assets to the beneficiaries during the final distribution of assets.

Do I Need a Lawyer for Estate Planning?

Although the law does not require that individuals secure legal representation to make estate plans, many find the support and guidance of estate planning attorneys invaluable. An estate planning attorney can help you identify the legal tools and strategies that suit your needs, as well as draft the necessary documents, such as wills, trusts, and powers of attorney. A legacy planning lawyer can help you preserve your estate’s wealth and may work with tax professionals.

In addition to addressing tax concerns and drafting documents, these attorneys can help you avoid probate. Probate, the process by which the court oversees the distribution of assets in a will, can be expensive and time-consuming for surviving family members. It also opens the door for disgruntled people to challenge the validity of the testamentary document, further complicating asset distribution. An estate planning attorney could help you organize your assets to transfer outside of probate to make the transfers simpler, easier, and less vulnerable to challenges.

Consult with your estate planning attorney for assistance in creating a legacy plan. To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

As we near retirement, we may assume that once Medicare kicks in, our medical insurance premiums will be fixed. However, many people may not realize that there are special rules regarding how much they pay for Medicare Parts B and D if they are in a higher income range.

What Is IRMAA?

If the Social Security Administration (SSA) determines you have a higher income, you will have to pay more for your Medicare Part B or Medicare Part D coverage. This surcharge  is referred to as the income-related monthly adjustment amount (IRMAA). It is paid in addition to your monthly premium amount.

Note that Medicare Part B pays for doctor visits, outpatient care, and related services. Medicare Part D is related to your prescription drug coverage.

How Is IRMAA Calculated?

To determine whether you must pay higher Medicare Part B or D premiums, the SSA bases the decision on your most recently filed tax return. Because of timing issues, this can often be your tax return from two years prior, as your most recent one may not yet be filed or in the IRS system.

If the SSA finds that you must pay a higher premium, they use a sliding scale based on your modified adjusted gross income (MAGI) to determine by how much. MAGI equals your total adjusted gross income and any tax-exempt interest income you have received in a tax year.

2023 IRMAA Brackets

The IRMAA 2023 threshold for married couples is $194,000. For any other filing status, the threshold is $97,000.

Once you cross these thresholds, you will pay more for coverage. How much more depends on how much you exceed these numbers. The SSA provides a chart to show you what you can expect in 2023.

The SSA calculates your IRMAA every year. So, while you may be subject to IRMAA for one year, you may not be subject to it the following year. If the SSA determines you will be subject to IRMAA, they inform you of this and its effect on your premium in writing.

How Will IRMAA Affect My Premiums?

Let’s start by understanding how IRMAA may affect your Medicare Part B and D premium. Usually, the split between SSA and you is 75 percent/25 percent. In other words, Medicare pays 75 percent of the premium, and you pay 25 percent. If you exceed the income thresholds, the split changes, and you may pay anywhere from 35 percent to the total cost, depending on your income level.

Again, refer to the SSA’s 2023 chart for your situation. So, for example, if you are filing taxes as a married couple and make between $194,000 and $228,000 in 2023, you will see on the 2023 chart that your Part B premium will increase by $65.90. Your Part D premium will go up by $12.20.

What If I Don’t Think I Should Be Subject to IRMAA?

What happens if your income listed on your most recently available tax return was much higher than what you are currently making or receiving? There is a way for you to inform SSA of the change in your finances.

For example, if you divorced, were laid off, or are making less money and you can document this, you can complete the Medicare Income-Related Monthly Adjustment Amount – Life-Changing Event form. This will inform SSA and ask them to reassess any imposition of IRMAA in your case.

You can also appeal the SSA’s decision where there was a change in your income but not necessarily in the form of a life event. For example, if you filed and IRS accepted an amended tax return for the year that is being used to calculate your IRMAA, you may be able to get the SSA to change its decision. Sometimes the SSA gets erroneous information about you from the IRS, and this may also be a basis to appeal.

There are a few different ways to appeal the SSA’s IRMAA determination. The appeal can be submitted in any of the following ways:

• online,
• in writing by completing a Request for Reconsideration, or
• through your local SSA office.

Speak With a Professional

If you have questions about IRMAA and your particular circumstances, it is best to speak with a professional. Timing matters, so seeking professional guidance as soon as possible after you receive notice of the IRMAA surcharge is essential.

To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

Are you a taxpayer who has purchased long-term care insurance (LTCI)? Take note of your policy details and your premium amount, as you may be able to deduct the cost – or at least part of it – from your 2023 income.

If your total eligible medical expenses (including your LTCI policy premium) for the year exceed 7.5 percent of your adjusted gross income, you may be able to take the amount of your LTCI policy premium as a deduction on your federal income tax return.

However, note that only certain LTCI policies qualify.

What Is Long-Term Care Insurance, and Do I Need It?

Long-term care insurance helps you cover costs for services you will likely need as you grow older, such as nursing home care or home health care.

According to LongTermCare.gov, U.S. seniors aged 65 today face a nearly 70 percent chance of requiring some form of long-term care later in life. In fact, almost a fifth of them will need it for more than five years.

Policies for this type of insurance can vary dramatically. Most will provide you with between $2,000 and $10,000 in funds each month, with premiums costing up to $5,000 a year. The younger you are when you purchase LTCI, the less pricey your annual premiums will generally be.

Keep in mind, too, that the average prices for long-term care have skyrocketed over time. For example, a private room in a nursing home will currently cost you more than $9,000 a month on average.

Unless you have very significant wealth, paying for LTCI may be well worth the cost, given how quickly long-term care can drain your retirement savings.

Can I Deduct My Long-Term Care Insurance Premium?

As mentioned above, only certain LTCI policies are tax-deductible. If your LTCI policy is considered “qualified” for tax deductibility, your total eligible medical expenses (including your LTCI policy premium) for the year also need to exceed 7.5 percent of your adjusted gross income in order you to be able to deduct your premium.

In addition, you are limited in how large a premium you can deduct. Read more about these caveats below:

1. Tax-Qualified Policies – To qualify for tax deductibility, your LTCI policy is required to meet specific rules, as outlined by the National Association of Insurance Commissioners (NAIC).

If you purchased your policy before January 1, 1997, it is likely qualified. (Double-check with your insurance broker or their state’s insurance commission.)

Policies purchased on or after January 1, 1997, have to meet a number of federal standards. Learn more about these standards on Page 9 of the NAIC’s Shopper’s Guide to Long-Term Care Insurance, available in PDF format.

2. Deduction Limits – The limit on your deduction depends on your age at year’s end. The IRS annually issues adjustments to these limits; it increased the 2023 tax-deductible limits by about 6 percent since 2022.

Note that if your annual premium amount for 2023 exceeds the limit provided in the table that follows, it will not be considered a medical expense:

Attained age before the close of the taxable year	Maximum deduction
Age 40 or under	$480 (up from $450)
Age 41 to 50	$890 (up from $850)
Age 51 to 60	$1,790 (up from $1,690)
Age 61 to 70	$4,770 (up from $4,510)
Age 71 and over	$5,960 (up from $5,640)

 

3. Other Caveats

• If you are self-employed, you can take the amount of the policy premium as a deduction if you made a net profit. Your medical expenses do not necessarily need to have exceeded 7.5 percent of your income.
• Most hybrid life insurance policies are typically ineligible for tax deductions.
• Note as well that benefits from per diem or indemnity policies, which pay a predetermined amount each day, are not included in income except amounts that exceed the beneficiary’s total qualified long-term care expenses or $420 per day (for 2023), whichever is greater.

For further details on these and other inflation adjustments, access the complete PDF from the IRS website.

Additional Resources

To get an idea of how much long-term care may cost you, visit Genworth’s Cost of Care online tool to calculate the cost of care where you live.

Be sure to seek out information from your attorney when it comes to evaluating your long-term care insurance needs as well as protecting your loved ones’ assets in the event that you do require long-term care. 

To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

Assisted living facilities and nursing homes are long-term housing and care options for older adults. Although people sometimes use the terms assisted living and nursing home synonymously, they are distinct.

Understanding the differences between assisted living and nursing homes is critical for those considering where to live as they age. This is because assisted living communities and nursing homes provide different types of care. While assisted living is appropriate for active older adults who need support with everyday tasks, nursing homes provide medical care to adults with significant health issues.

What Is Assisted Living?

Older adults who can no longer live on their own but do not require round-the-clock medical care can benefit from assisted living. While assisted living facilities can have nurses on staff, the primary focus is not on health care, but rather on supporting residents with daily life.

Activities of daily living (ADLs) are six basic activities that healthy individuals can carry out on their own on a daily basis. Depending on an individual resident’s needs, an assisted living facility can provide aid with showering, dressing, preparing meals, completing household chores, and taking medication on time at the correct dose.

While giving necessary support, assisted living communities maximize adults’ independence and autonomy. Residents typically live in private units similar to traditional apartments with kitchens that are part of larger communities offering opportunities to socialize with fellow residents. Units can have safety features tailored to older adults with mobility challenges, such as shower bars, widened doorways, safety rails, and enhanced lighting.

Difference Between Assisted Living and Nursing Home

Compared to assisted living, nursing homes may be the right fit for those with significant medical conditions requiring round-the-clock care. Nursing homes can offer more extensive health care services that are unavailable in many assisted living facilities. Therefore, nursing homes can be more appropriate for those with severe health needs.

As they provide critical medical support, nursing homes can help people with mobility complications or cognitive challenges that limit their autonomy. For instance, a person diagnosed with severe dementia might do better in a nursing home than in an assisted living facility. Some nursing homes have specialized memory care units for those with dementia. Nursing home staff can also provide medical care and supervision as well as help with the six activities of daily living.

Like assisted living facilities, nursing homes also offer help with daily living, such as bathing or help with medication management, and can adapt to individuals’ needs. For instance, showers and bathtubs may have safety bars, and doors may be wide enough to accommodate wheelchairs.

Yet nursing homes offer residents less freedom and independence than assisted living communities. Those receiving care typically do not have their own kitchens and may share a room with another patient.

What Are the Costs of Assisted Living Facilities and Nursing Homes?

Assisted living facilities and nursing homes can constitute a significant expense for residents and their families.

According to SeniorLiving.org, the median cost of assisted living in 2021 was $4,500 per month. Because of the higher level of medical care, nursing homes tend to be more expensive than assisted living. A private room in a nursing home averages $9,034 per month, and a shared room $7,908 per month.

Individuals can pay for assisted living or nursing home fees out of pocket or through long-term care insurance. Medicare does not cover assisted living or nursing home fees.

Medicaid coverage, however, does extend to nursing home fees. Though Medicaid does not pay for room and board at assisted living facilities, it includes the skilled nursing care and emergency response services that residents of assisted living facilities receive.

Additional Resources

Before selecting an assisted living facility or nursing home, research the community and ensure it is a good fit.

• Find and compare nursing homes with Care Compare.
• SeniorLiving.Org’s guide explains how to find an assisted living facility.

To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

The person you name as your executor will be accountable for a number of important tasks, even in managing the administration of a small estate. This may include filing tax returns, keeping meticulous records, and distributing assets to your beneficiaries.

At the same time, there are rules about what the person in this role is not permitted to do.

What Is an Executor?

An executor is a person you choose to administer your estate upon your death. When you have passed away, the executor, assuming they agree to take on this role and can do so, presents your will to the court. The executor then asks the court to confirm their appointment.

Each state has rules regarding who may or may not serve in this role. Basic rules usually include that the executor must be of the age of majority (in most states, age 18) and of sound mind. In some states, the executor must not have a felony conviction. There can also be other state-specific rules to qualify as an executor.

Assuming these rules are met, the executor may then begin to manage the estate affairs. The goal is to wrap up the estate in an orderly manner. Their responsibilities may include:

• identifying what assets and property comprise an estate
• determining what debts may need to be addressed
• honoring the wishes expressed by the decedent in their will (to the extent possible)
• filing any estate tax returns that may be needed
• and much more.

Appoint a Capable and Responsible Person

Serving as an executor is a serious undertaking. If you are preparing a will, it is important to choose someone you know you can trust, who is reliable, and who will take their role seriously. It is also essential they are capable, so their financial sophistication and ability to understand complex issues matter.

As part of this decision-making process, you may consider the things they would be prohibited from doing as well.

What an Executor Cannot (And Should Not) Do

In general, an executor may not engage in bad acts or abuse their role. So, for example, they cannot refuse to probate a will if they agree to take on this responsibility. They also cannot steal from the estate or mishandle estate property.

An executor cannot take money from bank accounts and use them for personal needs, transfer property for less than market value, pocket money they are collecting from rental properties that are part of an estate, and much more. Absent unusual circumstances, this is considered stealing.

If they steal from an estate, a court can remove them from their position and deem them liable for the return of stolen funds. Those who abuse their role in such ways may find themselves being sued by beneficiaries and dealing with other legal worries.

However, in most states, executors are allowed to receive a “commission” or fee for their services. In New York, for example, an executor collects commissions based on the estate’s value. If the estate is worth $100,000 or less, they are entitled to 5 percent.

They may also be reimbursed for any reasonable and necessary expenses they need to take on in carrying out their role. They have to go about collecting these amounts appropriately, which usually requires some court oversight and approval.

In addition, there are some exceptions for use of estate property by an executor. In many situations, such as where a parent leaves a home to their child, that child is also serving as executor. A will typically provides that living in the house is permissible in such a situation. A will may also have additional language that permits certain “self-dealing” by an executor.

Executors are also expected to honor what is set forth in a will unless it is not feasible. So, they cannot arbitrarily refuse to carry out the wishes of the individual who had appointed them to the role, refuse to acknowledge beneficiaries, or refuse to wrap up an estate.

However, as with most things, there are exceptions. For example, suppose a will provides for something that is illegal, against public policy, or simply not possible (i.e., gifting of funds that do not exist). In that case, an executor understandably cannot carry out such provisions.

An executor cannot fail to maintain good records. In managing an estate for the benefit of others, they are supposed to keep records of all expenditures and transactions. They will also be expected to make this information reasonably available to beneficiaries, the court, and other parties with a vested interest in the estate.

Further Resources

There are many other examples of things an executor cannot do. Because every estate and will are unique, it is best to speak with your attorney. They can help alleviate any concerns you may have about what an executor may or may not be able to do.

To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

A power of attorney is a powerful planning document that enables you (the principal) to give another person (the agent or attorney-in-fact) the power to act for you while you are alive.

Because it is often prepared in the context of estate planning, many believe it gives their agents the power to continue acting after their death.

Although every state’s laws and forms vary, most power of attorney forms specify that the agency relationship created by a power of attorney ends upon a person’s death.

What Does a Power of Attorney Do?

A power of attorney (POA) can convey a significant range of power to the person you appoint. This includes the ability to do the following on your behalf:

• Enter into real estate transactions;
• Enter into leases and purchase personal property;
• Buy bonds or other securities;
• Engage in banking transactions;
• Engage in business operating transactions;
• Handle insurance transactions;
• Engage in estate transactions;
• Make decisions concerning any claims you have or in which you may be involved;
• Make gifts or charitable donations;
• Manage any benefits you receive or are entitled to;
• Manage the financial aspects of your health care;
• Manage your retirement accounts;
• Handle your tax matters;
• Delegate any of the above responsibilities to a third party

Power of Attorney Forms

Most POA forms allow you to choose how specific or broad you would like the powers you give to be so that you can tailor a power of attorney to suit your needs. An agent can also update a power of attorney over time as a principal’s needs change.

In many states, these powers, once delegated, remain in place even in the event of your incapacity. People frequently execute a power of attorney for this reason. They do not want to worry about what may happen should they become incapacitated or whether a loved one will have the ability to handle their affairs if they are no longer able to do so.

Power of Attorney After Death

That being said, a power of attorney expires upon your death. So, if you have entrusted a particular person with carrying out certain functions on your behalf while you were alive, those abilities cease when you pass away.

If you wish for the same person to continue handling your affairs after you die, you would need to specify they serve as the executor or personal representative of your will or trustee of your trust.

If you are concerned about maintaining continuity or making sure a particular person oversees your affairs upon your passing, be sure speak with an estate planning attorney. Every person’s situation and needs are different, and state laws also vary. Connect with your estate planner to help you understand your local laws and tailor an estate plan that meets your needs.

To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

The Senate and House have cleared the passage of a year-end $1.7 trillion appropriations bill that will benefit older adults on a number of fronts.

The bill, which runs more than 4,000 pages and includes a wide variety of legislation, heads to President Biden next for his signoff.

Here is a breakdown of some of the highlights that relate to supporting older Americans:

Health and Housing

• Opt to age at home – The Money Follows the Person (MFP) Program has been helping older adults age in their own home or a community setting, rather than in nursing homes, since 1972. The newly passed bill extends MFP through September 2027.
• Age in place safely – The omnibus bill has also doubled funding for the federal government’s Older Adult Home Modification Program from $15 million to $30 million.For seniors with limited income, this program covers the cost of simple, low-cost home modifications – such as railings and temporary wheelchair ramps – that help them age in place safely.
• Provide for your healthy spouse if you are on Medicaid in a nursing home – Medicaid beneficiaries who must reside in a long-term care facility but have a spouse still living at home will continue to see their healthy spouse protected from poverty.Known as spousal impoverishment rules, these protections ensure that the healthy spouse receives income while their institutionalized spouse keeps their Medicaid eligibility. These protections, which are adjusted each year, will continue to be in place until September 2027.
• Continue to see doctors online – Lawmakers have extended access to telehealth services for Medicare enrollees for another two years.
• Find affordable housing with support services – The Housing for the Elderly Program has received a billion-dollar bump in funding as well.This program seeks to aid seniors with very limited income in securing housing that is within their means while also offering supportive services such as assistance with cooking and cleaning.

Retirement Savings

• Contribute more to retirement – For older workers, the omnibus bill raises what are known as “catch-up” contribution limits for retirement savings. Taxpayers ages 60 to 63 will be allowed to contribute an extra $10,000 to their 401(k) starting in 2025.
• Access 401(k) funds for emergencies – If you need to take money out of your 401(k) before reaching age 59½, under certain circumstances you will no longer have to pay the 10 percent penalty fee for withdrawing money early. As of the end of 2023, you will be allowed to withdraw up to $1,000 a year for unforeseen emergencies without incurring a penalty.
• Wait longer to withdraw money from your retirement accounts – Previously, you were required to begin withdrawing money from your retirement plan account starting at age 72. This mandatory withdrawal is known as a required minimum distribution (RMD).As of January 1, 2023, the new bill allows you to hold off until age 73 to take funds from these types of private retirement accounts.

  To learn more, reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan. 

Recent news stories may have made you aware of the “step-up in basis” and the current administration’s desire to eliminate or adjust it.

If you are considering engaging in estate planning or you may be inheriting assets, it is important to understand what the step-up in basis is and how it may affect you.

What Is the Step-Up In Basis?

The step-up basis is a provision in federal tax law. It determines how assets are valued for calculating capital gains taxes when a person passes away, leaves these assets to heirs, and those assets are sold.

So, for example, imagine a person passes away and leaves their home to their children through their will.

When the children inherit the property, the home’s cost basis changes. (“Cost basis” is the amount for which an item is originally purchased.) The home’s cost basis is adjusted – or “stepped up” – from what it was valued at when the parent originally purchased the home to its fair market value on the date the parent died.

In this case, suppose the original cost of the home 30 years ago was $100,000, and the “stepped up” basis in 2022 (date of death) is $300,000.

If the children then sell the home for $500,000, the resulting capital gains liability is calculated by subtracting the stepped-up basis from the sale price. This determines the children’s taxable gain ($500,000 – $300,000 = $200,000 gain). The effect is that the capital gain between the original purchase of the home and the children’s receipt of it is eliminated.

In other words, without the step-up in basis, the children who inherited the property would have had a considerably higher taxable gain after the sale ($500,000 – $100,000 = $400,000 gain). As a result, they would then have potentially had to pay more in capital gains tax.

Why Bequeath Assets Through a Will or Estate Plan?

Passing assets, such as the home in the example above, to your loved ones through your will or estate plan means those who inherit are often subject to much lower capital gains tax than if the assets were outright transferred or given to your loved ones during your life.

This is because assets transferred or gifted before death are subject to the purchaser’s cost. Capital gains tax is then calculated based on the differential between the original cost basis and the sale price (after considering any depreciation or other capital gains exclusions that may apply).

What Assets Step Up In Basis Upon a Person’s Death?

The step-up in basis can apply to many kinds of assets, including:

• real estate
• personal property
• brokerage accounts
• stocks
• bonds
• bank accounts
• businesses
• art
• antiques
• collectibles
• and much more

Gifting or bequeath these types of assets through your will or estate rather than giving them away during your life can make a big difference for your heirs.

In addition, under federal law, all community and marital property gets a new basis when the first spouse dies. Their death brings the property up to the fair market value at that time. So, a surviving spouse could sell these assets and take advantage of this adjusted basis. And, subject to certain exceptions, the qualifying property of the surviving spouse can also receive a second step-up in basis at their death.

When Does the Stepped-Up Basis Not Apply?

While some assets qualify for a stepped-up basis, some can lose the ability to receive an adjusted basis.

For example, a surviving spouse cannot benefit from a second step-up in basis for assets that had been placed into an irrevocable trust before the first spouse’s death.

The stepped-up basis also does not apply to the following types of assets:

• IRAs
• employer-sponsored retirement plans
• 401(k)s
• pensions
• tax-deferred annuities
• gifts made before death
• and some other assets

When Are Capital Gains Taxes Assessed?

Capital gains are taxed when an asset is sold (for a profit).

In the above example, if the house is sold three years after the parent’s death for $700,000 (which would mean it increased in value by an additional $400,000 during this time), then capital gains tax is potentially due on $700,000 (sale price in 2025) – $300,000 (stepped-up basis at date of death) = $400,000 of gains.

It is assessed and payable for the tax year in which the post-death sale occurred, and liability effectively shifts to the heirs who benefit.

Why Do Some Believe the Step-Up in Basis Should Be Eliminated?

Many believe the stepped-up basis creates an inequitable tax loophole that allows people with significant assets to shelter these assets from capital gains tax if they dispose of them through their estate.

For example, in the scenario above, if the home was initially purchased for $100,000 and sold by the heirs of the purchaser for $1,000,000 shortly after the purchaser’s death, $900,000 of capital gains would effectively never be taxed.

Meanwhile, someone who sell their assets during their lifetime will likely not get equal tax benefits (even considering the $250,000 personal residence capital gains exclusion) and may face a hefty capital gains tax bill.

On the other side of this argument are those who posit that not having a stepped-up basis can lead to double taxation. From their viewpoint, heirs or an estate would face capital gains tax as well as potentially significant estate tax.

This would likely only affect those with a good amount of wealth, given the current federal estate and gift tax exclusion, which will rise from $12.06 million in 2022 to $12.92 million in 2023. Most people will not fall into this category. Because of this, the tax revenue that the government could raise by eliminating the step-up-basis could arguably outweigh the double taxation issue.

However, this could all change after 2025, when the federal exclusion is set to be cut by approximately half. This will potentially affect a much larger group of people. The argument may not be so strong under those circumstances.

Navigate Estate Planning With a Qualified Attorney

Planning to avoid capital gains taxes is a complex endeavor that a person should only undertake with the assistance of a qualified professional. Every person’s situation is different, and there is no one-size-fits-all solution.

While saving money on capital gains may seem attractive, there may be situations where leaving assets to heirs upon your death may not be the best plan or may create more significant tax issues. In addition, it may not be the best strategy if, for example, you need to engage in Medicaid planning.

Reach out here to the MSW team — Amy Stratton or Kristen Prull Moonan — for answers to questions about capital gains taxes and whether you or your loved one may benefit from a step-up in basis.

There are various benefits to creating a testamentary trust. This article discusses the benefits of adding a testamentary trust to your estate plan.

What Is a Testamentary Trust?

A testamentary trust allows a testator to manage wealth by giving a trustee instructions for distributing their property after the trustee’s death. A testamentary trust is a part of the testator’s last will and testament.

Wealth Management and Asset Protection

A testamentary trust helps with overall wealth management by protecting the testator’s assets after their death. This type of trust can be used to name minors as beneficiaries of the testator’s estate. A testator can use it to ensure that the beneficiaries only receive assets after they reach a specified age. This reduces the chance of waste or misuse of assets.

Tax Benefits

Testamentary trusts have tax benefits. For example, if assets are placed into this type of trust, the beneficiaries are not required to pay taxes on the income generated and distributed from the trust twice. This is known as double taxation. However, if the trust earns more than $600 in income per year, the beneficiaries may be required to file a tax return for that year.

There are also capital gains tax benefits to placing assets into a testamentary trust. A person who sells an asset for profit may be required to pay a capital gains tax on the income generated from the sale. However, if legal ownership of an asset is transferred from one person to another through a testamentary trust, the capital gain received by the beneficiary is disregarded.

Keep in mind that testamentary trusts do not avoid probate. Probate is the legal process that courts use to ensure that the assets claimed by the estate are owned by the testator, that any creditors making claims against the estate have valid claims, and that the appropriate heirs receive the property listed in the trust. This means that estate taxes may not be avoided even if assets are placed into a testamentary trust.

Speak to a qualified tax professional or accountant to answer any questions you have about your tax obligations.

Trust Terms Can Be Changed During the Testator’s Life

The terms of a testamentary trust do not become effective until after the testator’s death. If your needs change or you gain or lose assets, you can return to the trust and adjust it accordingly. The malleable nature of a testamentary trust is also helpful if you have more children or your marital status changes.

No Effect on Pension Plans

Creating a testamentary trust does not affect your pension plan. If you name your child as a beneficiary of a testamentary trust, their access to their full pension plan benefits will not be affected.

Easy to Create

Testamentary trusts may be the easiest estate planning tool to create aside from a last will and testament. They can be included in your will at the time you draft it or can be an easy addition to the document at a later date.

Reach out here to the MSW team: Amy Stratton or Kristen Prull Moonan.