To gift or not to gift

By Linda M. Toga, Esq.

The Facts: I want to give my children and grandchildren significant cash gifts for the holidays, but I am confused about gift tax liability and about how gifting may impact my future eligibility for Medicaid in the event I need long-term care.

The Question:

Would you explain how gifts are treated for Medicaid and gift tax purposes?

The Answer: As they look ahead to the holidays, many clients call with questions about gifting and its consequences. There is a great deal of confusion surrounding gifts, and clients often assume that gifts that are exempt from gift tax are also exempt transfers under the Medicaid rules. Unfortunately, that is not the case.

When a person applies for Medicaid to cover the cost of care in a nursing home, social services looks at the applicant’s financial records going back five years. Significant gifts, also known as uncompensated transfers, made by the applicant during the five-year look-back period raise a red flag and can lead to a penalty period during which the applicant is denied benefits. While any gift is subject to scrutiny by social services, gifts of $2,000 or more, or a pattern of gifting in smaller amounts, are certain to prompt questions and likely to result in penalties under current Medicaid rules.

In contrast, annual gifts of up to $14,000 to any number of people are exempt from gift tax under the IRA code. Such gifts are essentially under the radar for tax purposes since they need not be reported and have no adverse gift tax consequences. A federal gift tax return only needs to be filed if a donor makes a gift in excess of $14,000 to any one individual in a calendar year.

For example, if someone gifts their son $20,000, the donor will have to report the $6,000 gift on a federal gift tax return that should be filed along with his/her personal income tax return next April. Even then, the donor will not incur any gift tax liability and no gift tax will be due unless and until the donor’s reportable lifetime gifts exceed the federal estate tax exclusion amount in effect at the time.

While the current exclusion amount is $3,125,000 and the figure is scheduled to increase annually for a number of years, it is important to note that the value of reportable lifetime gifts may be added to the value of your estate at the time of your death to determine if federal estate tax will be due. You cannot simply gift away your assets during your lifetime to avoid estate tax.

Based upon the facts set forth above, it is clear that a gift that does not adversely impact a donor’s taxes will likely result in denial of Medicaid benefits for a period of time if the donor applies for Medicaid within five years of making the gift. For this reason, it is important to carefully plan any gifting that you may be considering and to look at the impact that gift will have both on taxes and on your ability to obtain benefits should the need arise.

Linda M. Toga, Esq. provides legal services in the areas of litigation, estate planning and real estate from her East Setauket office. The opinions of columnists are their own. They do not speak for the paper.