Legal News

Pension Protection Act Paves the Way For New Ways to Finance Long-Term Care

Americans are living longer than ever before. Why? It's because:
• We tend to take better care of ourselves
• We have access to medical care that supports healthier lifestyles
• More of us remain active into our retirement years

As you look ahead to the future, your plans frequently center on family. Today, many Americans worry they’ll one day become a financial or emotional burden to their family - the people they love most. If you experience a health event and require long-term care (LTC) – and you have not prepared for this need – your family members could very likely become caregivers.

LTC insurance is a way to get reimbursed for covered expenses you may incur from receiving care – either at home or in a facility – when you are unable to do some of the six activities of daily living (ADLs): bathing, dressing, eating, continence, toileting and transferring.

Asset-based LTC products differ from traditional LTC insurance. These products provide a way to preserve retirement savings while providing a way for clients to pay the costs of an LTC event, if needed. Asset-based long-term care products are typically either life insurance or annuity policies that may be used for LTC if needed. You may also have heard of these policies referred to as hybrids, combination, or linked-benefit policies.

With these policies, if long-term care is needed, your life insurance death benefit or annuity value may be accessed to pay for qualifying long-term care expenses on a tax-free basis. If you only use a portion of your life insurance death benefit or annuity value before you pass away, your named beneficiaries will receive the balance of death benefit or annuity value. Once your life insurance death benefit or annuity contract is paid out for long-term care expenses, you may continue to receive long-term care benefits by purchasing an extension or continuation rider. If long-term care is not needed, your named beneficiaries receive the life insurance or annuity payout. This is a win/win situation! Someone will receive the benefits – either you or your beneficiaries.

Another critical feature of these types of asset-based policies is that your premiums are guaranteed. There are no surprises.

Please call Janet Hansen at 763-398-5800 with any questions you may have in planning for your long-term care needs.

New Federal Estate and Gift Tax Exclusion Amounts and Rates

The American Taxpayer Relief Act of 2012 (ATRA) made permanent the federal estate tax and set the effective exemption for combined bequests and gifts at $5 million and indexed that value for inflation. For 2013, the federal estate tax exclusion amount is $5.25 million; for 2014, it will be $5.34 million. The law also allows the surviving spouse to claim any exemption not used by their deceased spouse. This concept is referred to as "portability." The law also increased the federal estate and gift tax rate to 40%, 5 percentage points higher than in 2012.

The Tax Policy Center estimates that in 2013, just 3,800 estates—fewer than one in 700—will owe the tax. And they'll pay a total of just $14 billion—half the revenue collected five years ago.

The new law also increased the federal generation skipping tax ("GST") exemption to $5.25 million; the value is also indexed for inflation. A surviving spouse may NOT utilize their deceased spouse's unused generation skipping tax exemption, so there is no "portability" for GST planning.

The table below sets forth current federal exemption amounts:

Type of Federal Tax Exemption Amount Portability with Spouse
Estate Tax $5.25 million for 2013 ($5.34 million for 2014) Yes
Gift Tax $5.25 million for 2013 ($5.34 million for 2014) Yes
GST Tax $5.25 million for 2013 ($5.34 million for 2014) No

Minnesota Legislative Update

1. New Power of Attorney form beginning in 2014.
A new statutory power of attorney form will be required to be used beginning in 2014.The new form sets forth important information for the principal and provides notification of important duties imposed upon attorneys-in-fact. Existing powers of attorney will still remain valid. A power of attorney remains in existence until it is revoked in writing by the principal, or upon the death of the principal.

An attorney-in-fact acting pursuant to a statutory power of attorney must act within the limitations of the statute. If the attorney-in-fact is authorized to make gifts to the attorney-in-fact or to anyone the attorney-in-fact is legally obligated to support, the gift is limited to the federal annual gift tax exclusion amount in the year of the gift.

If the principal would like the attorney-in-fact to have broader authority, then principal should consider signing a General Durable Power of Attorney in addition to, or in place of, the statutory power of attorney.

2. New Minnesota Gift Tax
A new Minnesota gift tax applies to taxable gifts made after June 30, 2013, in excess of $1 million. The Minnesota gift tax rate is 10%. The gift tax is imposed upon the donor of the gift.

Generally, the new gift tax does not apply to annual exclusion gifts (present interest gifts of up to $14,000 per year, per person for 2013 and 2014), payments of another person's tuition, and payments of another person's medical expenses.

For taxable gifts, the Minnesota gift tax return will be due no later than April 15th following the year in which the gift is made.

There is no "portability" of a deceased spouse's unused Minnesota gift tax exemption.

Example: John Jones, a single person, makes his first gift to his daughter on August 1, 2013 in the amount of $1,114,000. John would need to pay no federal gift tax, but would be required to pay a $10,000 Minnesota gift tax, calculated as follows: $1,114,000 - $14,000 annual exclusion gift - $1 million exemption = $100,000 excess taxable gift X 10% tax rate = $10,000 gift tax owed.

3. New Requirements for Filing Minnesota Estate Tax Return
Effective for estates of decedents dying after December 31, 2102, and decedents who have an interest in property with a situs in Minnesota, the personal representative must submit a Minnesota estate tax return to the commissioner, on a form prescribed by the commissioner, if:

  1. A federal estate tax return is required to be filed; or
  2. The sum of the federal gross estate, and federal adjusted taxable gifts made within made within three years of the date of decedent's death exceeds $1,000,000.

The intent behind this new law is to close the "loophole" that existed under the prior law that allowed "deathbed" gifts to escape Minnesota estate tax. Now, taxable gifts made within 3 years of the date of death will be added to the federal gross estate to determine if a Minnesota estate tax return will be required to be filed.

4. Nonresident decedents who own pass-through entities with assets that contain real or tangible personal property that have a situs in Minnesota will be subject to Minnesota estate tax.
Under prior law, one way a nonresident decedent could avoid Minnesota estate tax on Minnesota based real estate or tangible personal property would be to form a pass-through entity (e.g., S corporation; LLC; partnership; or trust) and transfer the ownership of the property to the pass-through entity. This would technically change the makeup of the asset owned by the decedent to "intangible personal property", which would not be subject to Minnesota estate tax for a nonresident decedent.

Under the new law, the situs of the real or tangible personal property is determined as if the pass-through entity does not exist and the real or tangible personal property is personally owned by the decedent.

This will make it more difficult for a nonresident decedent who owns Minnesota real estate to avoid Minnesota estate tax.

5. Further clarification of the Minnesota Qualified Small Business Property and Qualified Farm Property Estate Tax Deductions.
Minnesota estate tax law allows an additional Minnesota estate tax deduction for certain qualified small business property and qualified farm property. The deduction is limited to $4 million per decedent. As initially enacted in 2012, the law left many questions unanswered. The amended statute attempts to answer many of these questions.

Owners of small businesses or family farms should review their estate plan to determine what is required to utilize this additional deduction.

6. Note: There is no "portability" of the Minnesota estate tax exemption by the surviving spouse of a Minnesota resident decedent.
Since Minnesota estate tax laws do not allow portability of a deceased spouse's unused estate tax exemption, and since "deathbed" gifts are now calculated in determining whether a Minnesota estate tax return must be filed, "A/B Living Trusts" by a married couple will be advisable more than ever.

7. Same Sex Marriage Now Legal in Minnesota.
With the passage of Minnesota Statutes 2012, Section 517.01, same-sex couples will be able to marry beginning August 1, 2013. This, coupled with the US Supreme Court ruling in United States vs. Windsor (which invalidated the Defense of Marriage Act), will allow same-sex spouses to qualify for government benefits afforded other married couples (e.g., estate tax marital deduction).

In light of these new laws, same-sex couples will want to review and update their estate plan to take advantage of laws afforded to surviving spouses.