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Fundamental to understanding federal estate taxes is that federal estate tax law exempts a certain dollar value of assets before the tax is imposed. If a person dies with an estate having a gross value below a certain amount, there is no federal estate tax and no return is filed. Any excess is subject to federal estate taxes. Further, generally speaking, there are no federal estate taxes imposed on the value of assets left to a surviving spouse, either under a Will, Trust, or through joint ownership or a beneficiary designation.


Unfortunately, if the first spouse to die leaves everything to the surviving spouse, while there is no federal estate tax imposed on those assets, the federal estate tax exemption available to the first spouse is completely lost. As a result, a standard tax planning technique was developed known as the Credit Shelter Trust (sometimes called an Exemption Trust or Bypass Trust). This technique enables a married couple not to lose the federal estate tax exemption at the death of the first spouse and to exempt a larger amount of assets from federal estate taxes. Consider this simple example. John and Mary have a combined net worth of $3 million. The exemption is limited to the first $1 million of assets. John dies first and leaves everything to his wife. There is no tax because of the unlimited exemption for assets left to a surviving spouse. When Mary dies, the first $1 million is exempt from federal estate taxes; however, the remaining $2 million is subject to federal estate tax at 40% for a tax of $800,000.00, leaving $1,200,000.00 to pass to the wife’s beneficiaries (in addition to the initial $1 million). However, if a Credit Shelter Trust is used, when John dies, $1 million of assets goes into the trust. The other $2 million passes outright to Mary. The trust is primarily for the benefit of Mary providing an income stream to her. At the time of her death, the trust dissolves and those assets pass to their children free of any federal estate taxes. The Credit Shelter Trust makes use of John’s $1 million exemption. At Mary’s death, the first $1 million of her estate is not subject to federal estate tax because of her $1 million exemption. This leaves $1 million of her estate subject to tax at the 40% rate for a federal estate tax of $400,000.00. Obviously, the Credit Shelter Trust can provide significant tax savings for a married couple.


Over the past several decades, the amount of the exemption has changed as well as the rate on the excess amount. However, under the American Tax Payer Relief Act of 2012, enacted January 1, 2013, the exemption amount for federal estate, gift, and generation-skipping tax transfers, was fixed at $5 million, indexed for inflation. The 2013 exemption, indexed for inflation, is $5,250,000.00.


Under prior law, if the first spouse to die did not use a Credit Shelter Trust to take advantage of the exemption, the exemption was simply lost. This changed with the Tax Relief Act of 2010 for two (2) years and was permanently extended under the American Tax Payer Relief Act of 2012. Essentially, this means that any portion of the federal estate tax exemption that was not used by the first spouse to die carries over to the surviving spouse to be used at the time of his or her death. This is a great benefit to many married couples who may, either through lack of knowledge, or other reasons do not have an estate plan that includes a Credit Shelter Trust, and also may simplify estate planning for married couples who have a combined net worth in excess of the federal estate tax exemption.


The question the new law imposes is whether or not Credit Shelter Trusts are still an appropriate estate planning tool for tax purposes. It is the author’s opinion that in a substantial majority of cases, the Credit Shelter Trust is not a needed or viable estate planning tool. However, there are some circumstances in which a married couple would still benefit from a Credit Shelter Trust. It is beyond the scope of this article to discuss those circumstances in detail; however, an example would be an estate plan for a married couple where one or both of the spouses was previously married and the prior spouse passed away. There can also be some non-tax reasons to establish a trust for a surviving spouse as part of an estate plan that would benefit from the use of a Credit Shelter type of trust.


As with any legal matter, an estate plan must be crafted based upon the specific facts and circumstances of the client. No lay person should attempt to craft their own estate plan, but should retain the services of competent legal counsel.


Historically, one of the most difficult estate circumstances involves the passing of the owner of a small family business or family farm. Frequently, the owner desires to leave the family business or farm as a going concern to his or her heirs. Unfortunately, in many estates that include such an asset, there are insufficient funds to pay applicable death taxes. Sometimes, the heirs would have to borrow money to pay death taxes in order to retain the family business or farm, or would be forced to sell the family business or farm, or some part thereof, to generate the necessary funds to pay death taxes.


Over time, a few estate planning techniques have been developed, not to eliminate the death taxes, but to provide cash to pay the taxes. One common technique was to have the owner establish an Irrevocable Life Insurance Trust and then gift the money to the trust so the trust could purchase life insurance on the owner sufficient to pay the anticipated death taxes on the family business or farm. Such trusts are very technical with several cumbersome requirements. Further, frequently when the owner would engage in estate planning, he or she would be at an age where the cost of the life insurance would be prohibitive, ruling out such a trust.


In 2012, the Pennsylvania Legislature amended the Revenue Code to provide an exemption from inheritance taxes for certain farmland and other agricultural property, and for certain businesses. This new exemption became effective for estates of individuals who die after June 30, 2012. There are specific requirements that must be met both at the time of death and for at least seven (7) years after the date of death for family owned businesses. There are also limitations on the value that is exempt. Although the requirements are somewhat less for the exemption for certain farmland and other agricultural property, there are some important considerations and restrictions. For example, there are several categories of farmland and agricultural property. The availability and extent of the exemption depends on which category a person’s farmland or other agricultural property fits into. The importance of knowing about these exemptions for small business owners and farmers relates to estate planning. There have been a number of estate planning techniques developed in an effort to reduce or eliminate the inheritance taxes imposed on family farms and businesses. Examples are the transfer of farmland with a reservation of a life estate and/or right to farm, or a Family Limited Partnership (typically known as a FLIP). There may be existing estate plans attempting to use some of these techniques, all of which have disadvantages and complications that may no longer be necessary if the family farm or business meets the exemption requirements. Further, owners of family farms and businesses who have not engaged in appropriate estate planning should do so now at a time when the availability of these exemptions will influence the nature of the estate plan.


As always, the lay person should seek out competent legal counsel to assist in this process.


The cost of long-term care for elderly individuals has skyrocketed over the past two (2) decades. Very few individuals or families have the assets or income resources to pay for the cost of long-term care (a typical year in skilled nursing care will cost approximately $110,000 - $120,000, plus whatever medical expenses or other living expenses a person may incur).


Many people have heard of Medicaid (often confusing it with Medicare) as a government program to pay for the cost of long-term care. Generally speaking, Medicaid is not available until a person has spent their resources down to approximately $2,500.00.


In my 35 years of practicing law, this area of the law is constantly changing in numerous ways. The underlying issue has always been whether an individual or family can do anything to protect assets of an elderly person for the benefit of his or her heirs and qualify for Medicaid. As we have seen the cost of long-term care escalate, the federal deficit grow, and serious questions arise concerning the financial viability of the entire social security system, which includes Medicaid, the government has continually tightened the Medicaid laws and regulations to make it very difficult to protect assets.


One of the important regulations relates to gifting of assets. When a person applies for Medicaid, that person must disclose all gifts made to anyone else within five (5) years prior to applying for Medicaid. The reason is to identify assets that could have been used to pay for long-term care that were given to someone else. There is a very high presumption that the gift was made for the purpose of qualifying for Medicaid and, while rebuttable, is very difficult to overcome.


Despite the general decline in the nuclear family, there has been an encouraging development. Specifically, more families, for a variety of reasons, are either willing to or have to undertake providing some level or non-medical care for an elderly family member. Much of this is motivated by a commendable desire of family members to allow an elderly person to live out their life with dignity rather than in an institutional setting. Family members are often able to provide a higher level of attention and quality of non-medical care.


In order to make family care of an elderly person feasible, it often requires the elderly person to make a gift of real estate or money arising out of the sale of the elderly person’s real estate. Frequently, the funds are given to an adult child to use to make an addition to the child’s current residence and/or remodel the residence to be handicap accessible. Sometimes the funds are used to purchase a new residence that is already equipped to accommodate the adult child and his or her family, as well as the elderly parent. Sometimes the adult child will sell his or her residence. The elderly parent will make a gift of his or her residence to the adult child so the elderly parent can remain in his or her home and funds from the sale of the adult child’s residence may be used to remodel and upgrade the elderly parent’s residence. Normally, under Medicaid regulations, any of these transactions would constitute a gift of available resources that would create a period of ineligibility for Medicaid.


However, these types of transfer transactions may not create a period of ineligibility if the transaction is properly structured under the child caregiver exception to the Medicaid transfer rules. Usually, this involves the use of a Family Caregiver Agreement that specifically defines the type of care to be given and the responsibilities of both parent and child. The care is usually non-medical care since the child is usually not medically qualified to provide medical care.


There are various legal issues to consider in structuring a Family Caregiver transaction. There are numerous issues that must be discussed and evaluated on a case by case basis. Further, a Family Caregiver Agreement may be beneficial in families where the disabled person may be eligible for VA aid and attendance pension benefits.


If you and your family are considering establishing a caregiver relationship that would involve the transfer of funds or real estate in some fashion from an elderly parent to an adult child, a Family Caregiver Agreement may provide significant benefits. As always, you should consult with a competent attorney to review your specific circumstances to determine whether a Family Caregiver Agreement would benefit you and your family.