Ethan R. Okura
Hawai‘i Herald Columnist
Happy New Year! The start of a new year often brings changes in state and federal laws that could affect your estate and Medicaid planning. The following is the 2020 update of important numbers to be aware of as you go about your planning.
• How much money and property can one have at death without paying estate taxes? At the end of 2017, Congress passed a new tax bill and the president signed it into law. It doubled the previous estate and gift tax exemption from $5 million to $10 million (adjusted for inflation). With inflation, the actual amount exempt from federal estate taxes for 2020 is $11,580,000 per person. This “doubling” of the estate tax exemption will expire at the end of 2025, unless Congress makes it permanent. If the Congress does not make it permanent, the federal estate tax exemption will go back to $5 million per person (adjusted for inflation) in 2026.
In 2012, state lawmakers amended Hawai‘i’s estate tax exemption to match the federal exemption. Thus, Hawai‘i’s estate tax exemption would have been $11,580,000 for 2020. But, on June 7, 2018, Gov. David Ige signed Senate Bill 2821 into law, freezing the Hawai‘i estate tax exemption at the Dec. 31, 2017, amount of $5 million adjusted for inflation.
The wording of the law was vague, so we weren’t sure whether the state Department of Taxation would take into account any adjustments for inflation after Dec. 31, 2017. Hawai‘i lawmakers cleared that up last summer by amending the law and adding the words, “as if the decedent died on December 31, 2017.” That made it clear that from 2018 and on, the Hawai‘i estate tax exemption amount is $5,490,000, with no adjustments for inflation allowed.
This makes estate tax planning more complicated and much more important for people who have close to or more than $5 million. In other words, you might not owe any federal estate tax and yet owe a Hawai‘i estate tax. Additionally, the Hawai‘i Legislature added a new estate tax bracket last summer, charging 20 percent on net taxable estates over $10 million. A very wealthy person could be subject to a 20 percent state estate tax and a 40 percent federal estate tax, resulting in a combined 52 percent tax on every dollar in the highest bracket.
* Note: Non-resident, non-citizens have an estate tax exemption of $60,000.
• How much can a person give away without paying a gift tax? In 2020, you can give $15,000 to a person without having to report the gift to the Internal Revenue Service. Married couples can give any amount to their spouse without reporting it to the IRS, as long as their spouse is a U.S. citizen. However, you can only give a non-U.S. citizen spouse $155,000 a year in order to avoid paying a gift tax. If you give more than $15,000 to any other person in one year, the amount over $15,000 is considered a “taxable gift” and you are required to file a gift tax return. Also, keep in mind that you can give up to $11,580,000 of taxable gifts and use up some (or all) of your total lifetime exemption amount and still not have to pay any gift tax.
Hawai‘i does not have a state gift tax. The combination of Hawai‘i’s lack of a gift tax and the federal gift tax exemption creates a loophole for people with estates larger than the $5,490,000 Hawai‘i estate tax exemption amount, but less than the aforementioned $11,580,000 federal estate tax exemption amount. It allows them to possibly give away ALL of their assets before death, thereby avoiding all gift and estate taxes. You might want to act quickly, as the larger federal gift tax exemption will expire in 2025 when it will revert back to $5 million adjusted for inflation.
If you do give away assets, keep in mind that there will probably be a Medicaid penalty if you need nursing home care in the future. Do not give away assets — not even your home or $15,000 per person — without first obtaining expert advice about the effect of the gift and generation-skipping transfer tax laws, capital gains tax laws and Medicaid laws.
• How much in assets can a husband and wife have and still qualify for Medicaid to pay nursing home costs for one of them? Together, a husband and wife can have $128,640 in nonexempt assets and still have Medicaid pay for the nursing home costs for one of them. This $128,640 is in addition to the following exempt assets, which the government will not count: necessities such as clothing, furniture and appliances; motor vehicles; funeral or burial plans and a burial plot for each household member; one wedding ring and one engagement ring; and up to $893,000 of equity in a home.
• If a person is not married, or if both husband and wife need nursing home help, how much in assets can each have and still qualify for Medicaid for nursing home costs? A single person can have $2,000. Each spouse of a married couple can have $2,000, unless they are applying in the same month; in that case, they can only have $3,000 combined.
• If you give away assets to your children, how long do you have to wait before you can qualify for Medicaid for nursing home costs without being penalized? The answer is five years. However, this does not mean that you must wait five years before getting Medicaid help. There are ways to reduce or eliminate the penalty period even before five years has passed. We can help families save their remaining money and/or the value of their home from nursing home costs and Medicaid liens without spending down everything — even at the last minute as the client is going into a nursing home without having planned ahead financially.
• If a person qualifies for Medicaid for nursing home costs, how much of the couple’s income can the spouse keep? The spouse who is not in the nursing home (called the “community spouse”) can keep all of his or her own income (Social Security checks, pension checks, etc.). If the income of the community spouse is less than $3,216 per month, the community spouse can also be given some of the income of the spouse in the nursing home to bring the community spouse’s income up to $3,216. The spouse in the nursing home must use the rest of his or her income towards nursing home costs and health insurance premiums, except for $50 a month, which can be kept for personal needs.
• When is a probate necessary? In Hawai‘i, probate is necessary if a person dies with real estate of any value or any other assets worth over $100,000 combined that are not in a revocable living trust, not in joint names with right of survivorship and that do not name a beneficiary.
© OKURA & ASSOCIATES, 2020
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.
