Dear Michael: We are so relieved we don't need to worry about estate taxes – if they had gone to $1,000,000 and they stayed at $5,000,000 per person. However, we still have a lot of issues with health and are concerned about the long-term impact of our health on the ownership of our land. What things were included in the new tax bill or the Health Care Act that will negatively affect us going forward? – Relieved.


Dear Relieved: In the new legislation in the tax bill, they made the Unified Credit permanent. Unlike past tax bills that had sunset provisions in them regarding how long the Unified Credit would be good for, this one made the $5,120,000 a 'permanent' amount, as well as the fact this amount will be indexed for inflation in years to come.

Indexing means that this $5,120,000 should grow by an index tied to inflation. The past few years, this indexing hasn't added much, as the overall economy did not grow very much. If we return to higher inflation years, this indexing should add more and more value.

In addition, they made the 'reciprocity' of the Unified Credit permanent. This means if the first spouse dies and leaves everything to the surviving spouse, the survivor can apply to use the unused Unified Credit of the first spouse. One must remember, though, in order to qualify for this unused credit, one must file with the IRS for this credit transfer within nine months of the date of death of the first decedent spouse. Nine months and one day later, you're too late and you lose the $5,120,000 credit.

I always put 'permanent' into parentheses these days, as any legislation is 'permanent' until a new Congress comes along and decides to change any or all of a 'permanent' part of existing law. In other words, nothing is truly permanent based on the ability of Congress to change the law.

It is, however, much easier to contemplate certain estate planning techniques knowing the Unified Credit has been made permanent.

One thing is for people who are considering setting up life estates, or trusts, or other methods of protecting their farm or other assets from Medicaid attachment, the five million/single ten million/married gift amount was left open. This allows for people to continue to use gifting as a method of protecting their assets.

The life estate was especially problematic as there was a gift of value at the time of the transfer of the residuary deed to children while retaining a life estate in the property. The value of this gift is based on an actuarial table set out by IRS to determine what this gift might be. This gift would then have been subtracted from the Unified Credit at the time of your death.

The life estate ownership has one unique tax aspect, however, that if estate taxes credits had been lowered, would have caused a great deal of problems. Life estates are still  included in the decedent's estates at their full market value at the time of death of the life estate owners.

In other words, if you have property worth one million, set up a life estate and gave the residuary deed to your children, you may have given a gift of $400,000 (40% of a $1,000,000 value on the land based on IRS's actuarial table.) Then, upon your death, the land is again placed in your estate for estate tax purposes and the $1,000,000 land had now grown to $1,500,000. If the estate credit had been lowered to $1,000,000, you would subtract the $400,000 gift (at the time of transfer) leaving you only $600,000 of credit, but then still have to include the land at $1,500,000 for estate tax purposes. You would have been $900,000 over and taxed at 40% or $360,000.

Being as the credit has been left at $5,000,000 dollars, this type of planning for smaller farms and ranches is still available – for now.

One thing people don't realize is that to change the rules regarding Medicaid approval and protection of assets, the Department of Health and Human Services doesn't need presidential or congressional approval. If they decide to change the look back period, or recognizing life estates as viable, or any other changes to Medicaid rules, they can change this in a heartbeat and give very little warning to the American public.

Considering all of the financial issues of our country – and most of these are regarding our aging population and their healthcare, don't be surprised that a new ruling regarding Medicaid is already in the works. Last time they changed the rules from three years to five years, they announced they made the changes on January 15th and the rules changed on February 6th, 2006 – roughly three weeks later. They didn't people much of a chance to react – which is kind of the idea.

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