By Nancy Burner, Esq.
In my practice as an elder law attorney, clients often inquire about the benefits of gifting to reduce taxes or to qualify for Medicaid. As a senior with the unexpected need for long-term care in the future, the consequences of gifting may have unexpected results.
It is a common myth that everyone should be gifting monies during their life to avoid taxation later. Currently, a person can give away during life or die with $5.45 million before any federal estate tax is due. For married couples, this means that so long as your estate is less than $10.9 million, federal estate taxes are not a problem. For New York State estate tax, the current exemption is $4.1875 million and is currently slated to reach the federal estate tax exemption by 2019.
While it is true that there are gifting estate plans that can reduce estate taxes, any gift that exceeds the annual gift exclusion must be reported on a gift tax return during the decedent’s life and is deducted from their lifetime exemption. In 2016, that exclusion is $14,000. However, while gifting may be good if the goal is to reduce estate tax, it can be detrimental if the donor needs Medicaid to cover the cost of long-term care within five years of any gifts.
It is important to remember that the $14,000 only refers to the annual gift tax exclusion under the Internal Revenue Code. The Medicaid rules and regulations are different. In New York, Medicaid requires that all applicants and their spouses account for transfers made in the five years prior to applying for Institutional Medicaid. These gifts are totaled, and for each $12,633 that was gifted, one month of Medicaid ineligibility is imposed for Long Island applicants. It is also important to note that the ineligibility begins to run on the day that the applicant enters the nursing home and is “otherwise eligible for Medicaid” rather than on the day that the gift was made.
For example, if a grandfather gifted $100,000 over the course of five years to his grandchildren and then needed nursing home care, those gifts would be considered transfers and, if they cannot be returned, would create a period of ineligibility for Medicaid benefits for approximately eight months. What makes this even more difficult for some families is that an inability to give the money back or help the grandfather pay for his care is not taken into consideration, causing many families great hardship.
It would have been far better for the grandfather to have put assets into a Medicaid-qualified trust five years ago to start the period of ineligibility and allow the trustee to make the annual gifts. Another concern when gifting is considering to whom you are gifting? Once a gift is made to a person, it becomes subject to their creditors, legal status and can adversely affect their government benefits.
Accordingly, if you make a gift to a person who has creditors or who later gets a divorce, that gift could be lost to those debts. Consider creating a trust for the benefit of the debtor-beneficiary to ensure that their monies are protected. Another problem arises when making gifts to minors. Because a minor cannot hold property, if gifted substantial sums, someone would have to be appointed as the guardian of the property for that child before the funds could be used.
To avoid this problem, consider creating a trust for the minor beneficiary and designate a trustworthy trustee who will manage the money for the minor until they are old enough to manage it themselves.
Finally, if gifting to a disabled beneficiary, make sure to review what government benefits they may be receiving. If any of the benefits are “needs based,” even small gifts may disqualify them for their benefits. In order to maintain eligibility, a Supplemental Needs Trust could be created to preserve benefits for the disabled beneficiary.
A common phrase comes to mind “do not try this at home.” Before doing any kind of substantial gifting, or even if you have begun gifting, see an elder law attorney who concentrates their practice in Medicaid and estate planning to help optimize your chances of qualifying for Medicaid and/or reduce estate taxes, while still preserving the greatest amount of assets.
Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office.