Most of my clients have heard that you can give away $10,000 per year to any other person without consequences. That’s not exactly correct. Some have heard that you should consider giving away your assets to your children or other loved ones 5 years before you might need to go to a nursing home. Therefore, many of them believe that you should start giving $10,000 per year to each of your children and grandchildren or other loved ones. For almost everyone, that’s not good advice.
In order to understand why it’s not good advice, we need to clarify the difference between IRS Gift Tax laws; and the laws related to qualifying for Medicaid for Nursing Home Costs.
First, we have to understand that IRS Gift Taxes and IRS Estate Taxes are a unified system. You have an exemption for Estate Taxes that allows you to pass away with up to $5,430,000 tax free. Because it’s a unified system, you can also use up some or all of that $5,340,000 Estate Tax exemption before you die to cover gifts you make during your lifetime without paying any tax. In addition to the $5,340,000 exemption, you’re also allowed to give away up to $14,000 to each person each year without using up any of that $5,340,000 estate tax exemption. (The $14,000 is called the annual exclusion. It used to be $10,000 per person per year, and is adjusted for inflation each year such that the exclusion is now $14,000 in 2015).
Because you’re allowed to give away up to $5,430,000 over your lifetime without any gift tax, 99% of the population will never have to worry about Estate or Gift Taxes. If you don’t have five million dollars or more in assets and you don’t expect to ever have five million dollars in assets by the time you pass away, you will never use up all of your Gift & Estate Tax Exemption—even if you give away everything you own all at once. So you can give away more than $14,000 and not have to worry about paying a Gift Tax. This is why for most people, limiting themselves to gifts of $10,000 or $14,000 per year makes no sense.
Even though you can give away $14,000 per year to each person with no IRS Gift Tax consequences, any and all gifts you make will create a penalty in the 5 year lookback period for Nursing Home Medicaid qualification—even if it’s under the $14,000 amount. Therefore, if you would like to reduce your assets to plan for Nursing Home Medicaid qualification, it makes more sense to give away everything you’re willing to give away all at once to start the 5 year clock ticking rather than slowly giving away only $14,000 each year and spreading out those gifts over multiple years, which would delay your future Medicaid qualification. You can also keep more control over your assets and protect them better if you give the assets to a properly drafted Irrevocable Trust than you could if you give the assets directly to your children or other loved ones.
For those who have more than $5,430,000 in assets, there are better ways to leverage the $14,000 annual exclusion gifts than just giving away cash. A competent estate planning attorney can help you utilize Family Limited Partnerships, LLCs, Irrevocable Trusts and other strategies to protect your estate from Gift & Estate Taxes.
In closing, the most important thing to have in place—whether or not you are ready to start gifting assets—is that you include in your financial Durable General Power of Attorney and in your Revocable Living Trust the right to make gifts of your assets to your family members and/or loved ones so that if you become incapacitated, your agent can give them away on your behalf when you are not able to do so yourself. It’s important to not limit this power for your agent to make gifts to only $14,000 per year. For Medicaid and Estate tax planning, it’s important for your family members to have the power to give away large amounts of your assets during your incapacity in order to protect those assets from taxes and nursing home costs. Be sure to have a Medicaid Planning specialist review your documents to make sure that your assets won’t become trapped in the event you become incapacitated.
© OKURA & ASSOCIATES, 2015