Health Savings Accounts (HSA): Another Estate Asset?

With all of the uncertainty surrounding the rollout of the new Affordable Care Act, many Americans are taking another look at their health insurance coverage. One thing is for sure: health care in the United States is extraordinarily complex. Becoming informed about some of this complexity - particularly, familiarizing oneself with legislative vehicles created to incentivize certain types of plans - can pay off in the form of tax savings. Health Savings Accounts (HSA's), added to the Tax Code in 2003, are one such congressional initiative and can be used to minimize taxes on money expended for employer-provided health coverage.

An HSA itself is a special tax-free account funded by employers, employees, or both, used in conjunction with a high-deductible health plan (HDHP). If an employer contributes directly to the account on behalf of the employee, that amount is deductible by the employer and non-taxable to the employee. In encouraging the use of health care plans above a certain deduction threshold ($1,250 for individuals and $2,500 for families; capped at $6,350 and $12,700, respectively), Congress expressed a belief that more out-of-pocket pay would lead to more responsible spending, thus keeping health care costs down in the economy as a whole. While this is certainly a debatable proposition, it is important in understanding the high-deductible requirement.

Notable requirements and features of an HSA-HDHP pairing, in addition to the deductible endpoints noted above, are the following: firstly, the total contribution amount for each HSA in 2014 is limited to $3,300 for individual coverage and $6,550 for family coverage. An additional contribution of up to $1,000 per year is allowed for those individuals 55 years and older. Secondly, taxpayers may deduct the amount of their yearly contribution each year; this deduction is treated as an adjustment to gross income and therefore is available to both itemizing taxpayers and those taking the standard deduction. Thirdly, these deductions are not subject to phase-outs (meaning that they do not become only partially or completely unavailable based on the taxpayer's income level), and they are not taken into account for purposes of calculating the Alternative Minimum Tax (an alternative means of determining a taxpayer's income by ignoring certain preferences in the tax code for the sake of calculation and potentially imp

Finally and most importantly, the explicit tax benefits of the HSA are that the money in the account grows tax-free, and that when taken out to be spent on medical expenses it is non-taxable to the employee. (Medical expenses must be "qualified" as such; however, the allowed expenditures cover a wide variety of medical issues; this list is broader than most insurance policies' coverage.) If money is taken out to be spent other than on health care, however, it is subject to a 20% penalty in 2014 and is also subject to taxation as income. (The exception to this rule is that those of retirement age withdrawing money to pay non-medical expenses do not face a penalty; they do, however, have to pay income tax on the amounts withdrawn.) Moreover, within the annual contribution limits, a taxpayer may contribute to an account that carries a balance from prior years - meaning that a HSA could be a very valuable retirement planning vehicle if desired. Unsurprisingly, HSA's have been rapidly gaining in popularity in recent years; consult with an estate planning attorney to see whether an HSA account could fit with your estate planning needs and goals.

Basics of Estate Planning: Maryland Increases Estate Tax Exemption

On March 19th of this year, the Maryland legislature approved a bill that would raise Maryland's current state estate tax exemption from its current $1 million leve. The Maryland legislation, which is expected to be signed shortly by Governor Martin O'Malley but as of today it is still awaiting his signature would eventually raise the Maryland state exemption level to the federal estate exemption level.

Currently, assets forming part of a Marylander's estate upon his or her death in excess of the $1 million threshold would be subject to a state-imposed estate tax this year. Unlike the 2014, federal estate tax exemption amount of $5.34 million. The Maryland legislation provides for the estate tax threshold to continue to rise until it is aligned with the federal estate tax exemption in the year 2019. In 2015, the threshold will be $1.5 million; in 2016, $2 million; in 2017, $3 million; in 2018, 4 million; and finally, in 2019, an amount equal to the federal threshold (which is projected to be $5.9 million in that year once it is adjusted for inflation).

The issue of raising or eliminating state estate taxes has become a recurring debate among the less than half of U.S. states that impose such a taxⁱ. In deciding whether to repeal, phase out, or increase state estate taxes, legislatures have to weigh the foregone revenue that would result from collecting less money in taxes versus the potential for Maryland residents to move out of state in order to avoid the tax. Maryland was, after all, named to Forbes' "Where Not to Die" lists in both 2013 and 2014 - something lawmakers recognized as negatively impacting Maryland's "national reputation." Proponents of raising the threshold in Maryland - which currently kicks in over $4 million earlier than the federal estate tax does - suggest that not only might residents leave the state as they near retirement age, they might choose not to move there in the first place, which would affect the state's economy.

Figures on how much revenue is actually lost due to those leaving the state for tax reasons are of course clouded by the fact that many leave for entirely unrelated reasons -the desire to move to a warmer climate, or to be closer to family members. Regardless, Maryland's judgment on this issue has now caused it to fall in line with other states doing away with their state estate taxes entirely. Midwestern states such as Indiana, Ohio, and Kansas and southern states like Oklahoma and North Carolina have recently repealed these taxes. Maryland's recent developments are notable due to its large Democratic constituency (eliminating the so-called "death tax" on the wealthy has commonly been an issue advanced by the Republican Party). The fact the 2014 is an election year for Maryland to elect a new governor to replace Martin O'Malley and the numerous rumors floating around that Governor O'Malley wants to seek higher office probably aided in the legislation's passing.

It should still be noted, however, that Maryland residents with significant assets are not completely out of the woods: Maryland is one of only two states - New Jersey is the other - that impose an inheritance tax in addition to their own estate tax. Immediate family members, ,i.e. those members in the familial line to the decedent, are exempt from paying state inheritance taxes; however, those outside this small circle are subject to a 10% tax rate on anything they inherit. As always, careful estate planning and knowledge of these important legislative developments can help keep money within the estate for future generations to enjoy.

Estate of the Month: Mickey Rooney

Mickey Rooney passed away earlier this month at the age of 93. He was a Hollywood acting legend with career that spanned over 88 years of his life. His IMBD resume lists 338 credits to his acting resume. He was also the recipient of a lifetime Oscar award in 1983ⁱⁱ . He won an Emmy and two Golden Globes awards, among many other accolades.

Unfortunately, his like many other celebrity estates, Rooney's had been the subject of considerable dispute and infighting between family members during his lifetime. Being married 8 times, the last one to Jan Rooney for the last 35 years of his life and having 9 children from 4 of those marriages probably does not help.

However, unlike those estates, Rooney's was valued at only $18,000 total at his death; at one time it was reportedly worth millions. In a will signed March 11th - less than a month before he passed - Rooney left all of his assets to his stepson, Mark Rooney, who was caring for Mickey at the time of his death. Mark is the son of Mickey's eighth wife, Jan, whom he married in 1978. As of 2012, the two had separated, and Jan received nothing from Mickey's will (per a separation agreement executed in 2012, Jan released marital claims to the estate in exchange for the receipt of Rooney's Social Security payments and some pension benefits). Neither did his prior wives or any of his other children or stepchildren.

While Rooney's professional life was marked by great success - he was the highest paid actor in Hollywood in the years spanning the late 1930's and early 1940's - his personal life was significantly rockier. As mentioned above, Rooney was married - and divorced (or separated) - eight times. But his relationship troubles did not end there. Sadly, Rooney was a victim of the types of elder abuse I discussed last month - Jan's other son, Christopher Aber, allegedly stole funds from Rooney's estate and imprisoned Rooney in his own home, among other things. Due to these events, in 2011, Rooney was appointed a conservator to investigate the state of his affairs and protect against further abuse; the conservator sued Aber on Rooney's behalf for financial exploitation last year. This suit resulted in a settlement in October in which Aber agreed to pay Rooney almost $3 million dollars; however, this sum is currently viewed as uncollectible due to Aber's own lack of funds. As a result of this experience, Rooney has advocated before Congress for stronger legal safeguards against the type of abuse sadly experienced by many Americans on a day-to-day basis.

The fact that Hoffman and O'Donnell were not married at the time of Hoffman's death and the absence of any reference to Hoffman's second and third children in his will created a number of obstacles to his estate administration that could have been avoided with more careful planning. Firstly, Hoffman's is yet another celebrity estate facing extremely adverse tax consequences. His estate has been estimated at $35 million for estate tax purposes. Federal and New York state estate taxes will consume between $12 and $15 million. That is over one third of his estate and could reach as high as forty-three percent (43%.) This amount is computed by taking into account the value of assets over $5.34 million and taxing them at a rate of 40% (as per the federal estate tax), and then adding in New York's tax rate of 16% on assets over $1 million left to non-spouses. Eek!

Unsurprisingly, Rooney did not wish any member of his family to be the executor of his estate. Instead, his former conservator, Michael Augustine, is serving in that role. Even having taken this precaution, however, Rooney has been at the center of yet another family feud, this time over where he is to be buried. Apparently he had purchased a cemetery plot with his wife Jan years before they separated, and Jan believed that Rooney's wishes had not changed since that time. Thankfully, Jan and Augustine reached a settlement with regard to the matter just before a scheduled court hearing on April 11th, in which Jan agreed to drop the suit. Rooney is now to be buried at Hollywood Forever cemetery in Los Angeles, California, along with other famous actors. Rooney will be fondly remembered as one of the all-time Hollywood greats - here's hoping that his estate woes and personal struggles are finally at rest.

ⁱNew York also recently passed legislation raising New York's state estate tax exemption level for decedent's dying after April 1, 2014.

ⁱⁱRooney was the first teenager nominated for an Oscar in a leading role for his portrayal of Mickey Moran in Babes in Arms.