How Does the Affordable Care Act Affect Taxes and Estate Planning?

No legal news item last week was bigger than the U.S. Supreme Court's decision to uphold virtually the entirety of the Affordable Care Act. In a move that surprised many observers, in a 5-4 decision the Court deemed the controversial "individual mandate" portion of the measure constitutional on grounds that it constituted a tax. While the court held that the Congress could not pass the law pursuant to its power to regulate interstate commerce, it did find it a permissible use of the legislature's taxing power.

Now that the matter is reasonably settled, local residents may be wondering how the law affects their estate planning, if at all. A recent Smart Money story talked about some of these issues, explaining how certain tax matters will indeed change in the upcoming year as a result of the decision. A few select rates will change next year. For example, an extra .9% Medicare tax increase will start for various individuals making over $200,000 or $250,000. In addition, some investment income (long-term capital gains and dividends) may face a 3.8% "Medicare contribution tax." This is in addition to the rising rates if the "Bush tax cuts" expire without renewal.

Starting in 2013, a cap will be added on contributions to a healthcare "flexible spending account" (FSA) plan. Right now there is no cap, so an unlimited amount of money can be contributed to the plan which is then subtracted from taxable income. The money can be used to reimburse qualified medical expenses. Starting next year, contributions to those plans will be capped at $2,500. Similarly, itemized deductions for medical expenses will now apply only to expenses that exceed 10% of annual gross income (up from the current 7.5%).

However, it is important to keep these tax issues in perspective, because they represent just a part of the bill. The overall goal is to provide comprehensive health insurance for more Americans so that overall expenditures go down while quality of care goes up, but the long-term effect of these sweeping changes will not be fully fleshed out for years to come. While the high-profile and controversial nature of the law may suggest that many things will change for all residents once it is fully in effect, the truth may be a bit less dramatic for many local families.

Planning for Couples with an Age Gap

Each estate plan is slightly different, but there are some challenges in estate planning that present themselves to different couples.  One common challenge is planning for married couples who have a significant age difference.

Perhaps the most obvious issue involves overall financial planning.  With age differences, one spouse is likely to outlive the other, perhaps by a considerable length of time.  The younger spouse may therefore feel more comfortable taking certain risks than the older spouse who is more likely to suffer from short-term financial dips.  It is important to balance the interests of both partners.  Couples of different ages require unique planning so that time horizons are meshed.  Retirement planning can be tricky if one spouse plans on working longer.  Similarly, long-term health care planning will be implicated by the age differential.  One spouse may need care earlier, though it is usually not prudent to automatically assume that the younger spouse will be able to provide the needed care.

A recent Morning Star article touched on many of these topics and mentioned a few other issues to consider for couples in this situation.  One point made in the story is that these couples often need to prioritize long-term care and life insurance.  Planning for disability is particularly crucial to couples, because family finances must account for both partners.  If one spouse is injured or faces a medical complication and is disabled, then family finances may be decimated if expensive, long-term care is needed.  In the worst-case scenario, assets are exhausted to care for one spouse while the second spouse remains healthy.  In order for the sick spouse to receive Medicaid support, assets for the entire couple must be below a certain level.  The healthier spouse can be left with little to no assets.  In these situations it is critical to get professional advice, as certain strategies can be employed in order to save as many assets for the second spouse as possible while still allowing the ill spouse to qualify for Medicaid.  This is particularly true for spouses with large age differences, because the younger spouse often needs assets to last for many years to come.