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By Nancy Burner, ESQ.

Nancy Burner, Esq.

Gifting and Medicaid planning is commonly misunderstood. We often see clients who believe that the gifting rules for Medicaid are the same as the IRS gifting regulations. 

The IRS allows a person to give up to $15,000 per person annually without penalty. Under the code, all gifts made in any given year are subject to a gift tax. However, the first $15,000 gifted to each individual in any given year is exempted from the gift tax, and for that reason, for many individuals, gifting during their lifetime is a way to distribute wealth and reduce their taxable estate at death. Medicaid is not the same.  

Oftentimes, seniors and their children believe that this same exemption holds true for Medicaid eligibility, and that gifting this amount of money away annually will not affect them should they need to apply for Medicaid benefits in the future. 

Medicaid requires that all Medicaid applicants account for all gifts and transfers made in the five years prior to applying for Institutional Medicaid. These gifts are totaled, and for each approximately $13,053 that was gifted, one month of Medicaid ineligibility is imposed. It is also important to note that the ineligibility begins to run on the day that the applicant enters the nursing home rather than on the day that the gift was made.  

For example, if someone has approximately $180,000 in his or her name and gift annually $15,000 to each of four children, the $180,000 would be gone in approximately three years. Under the IRS code, no gift tax return would need to be filed and no tax would be owed. If at the end of those three years the individual then needed Medicaid, those gifts would be considered transfers “not for value” and would have made him or her ineligible for Medicaid benefits for approximately 13 months.  

In other words, the individual would need to privately pay for the nursing home care for the first 13 months before Medicaid would kick in and contribute to the cost of care. 

The amount the individual would pay on a monthly basis would depend on the private monthly cost of care at the nursing facility. If the nursing facility costs $17,000 per month, the individual would need to pay that amount for 13 months totaling approximately $221,000.  

What makes this even more difficult for some families is that an inability to give the money back or help mom or dad pay for her or his care is not taken into consideration, causing many families great hardship. It is important for families who have done this sort of gifting to know that there are still options available to them.  

An elder law attorney who concentrates his or her practice on Medicaid and estate planning can help you to optimize your chances of qualifying for Medicaid while still preserving the greatest amount of assets.      

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. 

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By Linda Toga

screen-shot-2016-12-08-at-3-41-23-pmTHE FACTS: With the holidays fast approaching, I’ve been thinking about making gifts of cash to my grown children. I’ve heard that I can give each child $14,000 without any negative tax consequences. I am not wealthy but, at this point, I believe I can afford to give each of my children $14,000. I know they could really use the money.

THE QUESTION: Is there any reason I should think twice before making the gifts?

THE ANSWER: The quick answer is that when you’re talking about giving away thousands of dollars, you should always think twice. That being said, there are many factors that you should consider before deciding whether making significant cash gifts to your children is in your best interest.

Since you did not mention your age, your health status or the number of children you have, it is difficult to say which factors may prove the most important in your decision-making process.

Under current federal gift tax laws, a person can give any number of people up to $14,000 a year without incurring any gift tax liability. The recipients of the gifts need not report them on their tax returns and can simply enjoy the grantor’s generosity.

The need for the grantor to report gifts to the IRS only arises if the value of the gifts made to any one person in a single calendar year exceeds the $14,000 gift exclusion.  In that case, in April following the year in which gifts valued at over $14,000 were given to a single recipient, the grantor is required to file a gift tax return with the IRS. The return reports the amount of the gift in excess of $14,000.

For example, if the grantor made a gift of $20,000, he would have to report $6,000 of the gift on the gift tax return. Under current federal law, no gift tax will be due unless and until the cumulative value of the gifts reported by the grantor exceeds the estate tax exclusion amount in effect when the gift tax return is filed.

For gifts made in 2015 and reported in 2016, the grantor would not have to pay any gift tax unless the value of his cumulative lifetime gifts exceeded $5.45 million. Under New York State law, there is no gift tax, but the value of gifts made in the last three (3) years of the grantor’s life may be added to the value of his estate for purposes of calculating estate tax.

Since most people are not in a position to give away millions of dollars during their lifetime, whether or not a gift triggers a gift tax liability is usually not a deciding factor in making gifts. A more important factor for many grantors is whether they will need the money as they age. The cost of long-term care and the possibility that the grantor may need to apply for Medicaid are factors that frequently dictate whether gifting is a good option.

While the gift tax laws allow people to make gifts of up to $14,000 to countless people each year without adverse tax consequences, Medicaid eligibility is not governed by the tax code. As a result, many people who make gifts in accordance with the IRS guidelines are later surprised to find they are penalized for making those gifts when applying for Medicaid.

Under the Medicaid guidelines, gifts made within five (5) years of applying for benefits may trigger a penalty period based upon the value of those gifts. For younger, healthier grantors, the risk of having to apply for benefits within five (5) years of making a gift and then facing a penalty period may be minimal. However, the risk increases for the elderly or those with serious health conditions.

If you feel that you have adequate assets to cover the cost of your care, or if you have a generous long-term care insurance policy, you may not be concerned about the cost of care down the line, in which case making significant gifts to your children should be fine.

However, before you actually write those $14,000 checks to your children, I encourage you to carefully look at both your financial and physical health and assess your risk tolerance. After all, you don’t want to make the gifts this year and then have to ask your children to return the money or pay for your care next year.

Linda M. Toga, Esq. provides legal services in the areas of estate planning, probate and estate administration, real estate, small business service and litigation from her East Setauket office.