15 December 2010

The Other Estate Tax Revisited

Congress is close to a deal that will make the estate tax for rich heirs more lenient than it has ever been since it was enacted. In 2006, that tax generated $1,000,000 revenue per return with tax owing, was paid by about 30,300 estates per year, and left heirs $2,000,000 of assets tax free and never taxes more than 46% of the entire estate.

There has been nary a peep, however, about the other estate tax. If you aren't a lawyer, financial planner or nursing home administrator, or have a family member who has been affected by it, your probably don't even know that it exists.

The other estate tax, which no one talks about, generates $1,000 of revenue from each of about 400,000 estates per year, seizes virtually all of the property in the estate, and applies only to those with less than about $36,000 a year of income and no assets more substantial than a modest home (usually with well under $200,000 of equity) and car, in their final years.

The estate tax cuts about to be passed by Congress this year are orders of magnitude greater than the total amount recovered with the other estate tax, the one paid by the working class and middle class called the Medicaid Estate Recovery System.

About half of all nursing home costs in this country come from Medicaid, about 8 million of whom are in nursing homes at any one time. To be eligible for the program you have to have income insufficient to pay for nursing home care at a regulatorily determined average state cost of nursing home care, have almost no cash on hand, and very few other assets other than equity in a home where a spouse lives or to which you intend to return and equity in a car you use to go to medical visits or that a spouse not in a nursing home uses. Gifts you make in the five years before you need nursing home care can disqualify you from the program.

Nationwide, the estate recovery program recovers only about $362 million a year, about 1% of the collections of the estate tax and only about 0.8% of Medicaid nursing home spending. But, this tax affects 13 times as many people as the estate tax and deprives them of any and all of the definitionally very modest inheritances (typically a family home and a car and some ordinary household goods) that they might otherwise have received.

Since it affects so many people, the estate recovery program drives as much or more legal work to deal with it than the estate tax for rich people does.

If the people really think that death taxes of broad applicability are a bad idea, this program should vanish and soon.

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