The death tax most US families pay is NOT the "death tax" we argue about in our political debates.
The "death tax" political discussion is about the federal estate tax which doesn't affect anyone with an estate worth under 12.92 million dollars.
How Federal Estate Taxes Work
The Internal Revenue Service (IRS) requires estates with combined gross assets and prior taxable gifts exceeding $12.06 million for 2022 and $12.92 million for 2023 to file a federal estate tax return and pay estate tax as required. For an estate worth $13 million with a 2023 exclusion limit of $12.92 million, estate taxes would be levied on $80,000 of the estate.
The unlimited marital deduction eliminates the estate tax on assets transferred to a surviving spouse. However, when the surviving spouse who inherited an estate dies, the beneficiaries may owe estate taxes if the estate exceeds the exclusion limit.
How State Estate Taxes Work
An estate that escapes federal tax may still be subject to taxation by the state in which the decedent was living at the time of their death, however, estates valued at less than $1,000,000 are not taxed in any jurisdiction.
12.92 million dollars! How many Boomers have accumulated that much wealth?
According to the Tax Policy Center only 4,100 estate tax returns were filed in 2020 and only 1,900 of those will be taxable.
Only 1,900 deaths out of about 2.8 million deaths a year trigger the federal estate tax.
Not many people are paying estate tax.
Lets stop cutting it and start raising it.
The Death Tax we should be talking about.
The real death tax most of us will pay is the cost of dying, i.e. medical and especially long-term nursing home care at the end of life. These costs can be huge with long term care costs approaching $10,000 a month. These can eat up most family wealth in a couple years or less.
Here is a decent summary of the issues.
How Much Does Long-Term Care Insurance Cost?
The average cost for a semi-private nursing home stay in the United States is $7,756 for just one month.6 And that number rises to $8,821 for a private room.7 Remember, that’s per month!
The estimated cost for care in the final five years of life is $367,000 for people with dementia and $234,000 for those without.8 On average, Americans pay a total of $172,000 for long-term care.
Medicaid
Medicaid will pay some of the costs but often you have to go though all your assets (be flat broke) before it will kick in and states can come after any remining assets.
After People on Medicaid Die, Some States Aggressively Seek Repayment From Their Estates
Medicare can also look back 5 years for transactions that may be trying to shield wealth, like gifts to children, etc.
As the article notes, the wealthy have legal ways to shield their wealth and Long-term care insurance is available.
Long Term Care Insurance
I'm not a long term care specialist but I don't think much of the LTC insurance option at this point. (from the link above)
Right now, the average 55-year-old man will pay $1,700 per year for a three-year policy that covers $164,000 in care and a daily max of $150.13 And this benefit compounds every year at 3% so it would hit close to $400,000 by age 85. The average 55-year-old woman will pay $2,675 for the same level of coverage.14 Women pay more because they tend to outlive men. According to federal data, women outlive men by about five years and need an average of 3.7 years of care as opposed to only 2.2 years for the average man.15,16
A 55 year old couple would pay about $400 a month for around $400,000 each of protection at age 85. That would cover about 4 years of long term care at todays prices. With health care inflation that might be only a few months after a 30 year time span. Also, many people enter LTC earlier than 85 with about 17% being younger than 65.
Also, LTC insurance is a pretty recent product so not everyone had a chance to buy at age 55.
So insurance is an option but I think estate planning with a law firm may be a better option.
I know two people who each had a parent enter a nursing home at about the same time. One family was wealthy with large land holdings and investment assets while the other was working class, a homeowner with a pension and a little over 100,000 in savings.
The working class family used everything they had paying for long term care, selling the house and going through all the cash in less than two years. After all the assets were gone Medicare started paying. There was no estate.
The wealthy family had legally protected their assets and the family member spent several years in the nursing facility with medicare paying for it all. All assets stayed in the family.
So yeah, I think the legal option is the best way to protect wealth for your heirs.
Start planning now.
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