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Is it Time for Gift Giving?

As we enter December, most of us begin thinking about giving gifts to those we love. Although retail stores have bombarded us with holiday decorations since October, once December rolls around it’s time to get serious. Many of my clients consider gifts of cash to their adult children taking advantage of the annual exclusion allowed by the IRS. Once they reach a certain age, they begin to realize they are not likely to outlive their money and want to experience the joy of giving prior to death. Sometimes, the gifting is to grandchildren entering graduate school, or buying their first home.  Other times, and adult child might be entering a different phase of life, such as new career, or starting a business. Regardless of the reason, cash gifting is a frequent topic of conversation with clients as we head into year’s end.

This article will address some of the common questions I get concerning cash gifting to adult children or grandchildren.

  1. How much can I give without paying taxes?

The IRS sets a limit called the annual exclusion amount that lets you gift a certain amount without having to worry about filing a gift tax return. For 2019 that amount is $15,000 per gift, to as many people as you like. So, you could give your two children $15,000 each, and your two grandchildren $15,000 each, for a total gift of $60,000 and no return would be due.

  1. What if I go over the annual exclusion amount?

If you go over that amount, per person, then you would need to file a gift tax return. For example, say you give your granddaughter $5000 for a wedding gift, and then give her $15,000 when you make the annual gift. You have exceeded the $15,000 limit to her, so you would need to file a gift tax return for the $5000 in excess of the limit. However, unless you have exceeded your maximum lifetime gift amount of $11.4 million, you won’t pay a gift tax.

  1. Can both myself and my spouse make a gift?

Yes, using the example above, you and your spouse could each gift $60,000 to the children and grandchildren. The gift tax exclusion is for each person, not a couple, and everyone has their own lifetime limit of $11.4 million before they have to pay a gift tax.

  1. If the IRS says I can gift without penalty, why isn’t it okay with Medicaid?

Although you would think the IRS and Medicaid would be on the same page, unfortunately, no. Any gifts made, without full consideration (getting something of equal value in return), is considered a penalizing gift under Medicaid rules, with a few exceptions.

  1. Do all gifts create a penalty if I need Medicaid?

No, only gifts made “with the intent to qualify for Medicaid” are penalized. If you give a child money to pay for medical expenses, or to help with a down payment on a home, only to get a diagnosis of dementia a few years later, it is easy to document that the gift was not made with an intent to qualify for Medicaid at the time of the gift.  Some gifts, however, are allowable under Medicaid rules. For example, you can gift to your spouse or to a blind or disabled child without penalty. Regardless, its still a good idea to seek legal counsel if you are considering gifting and have a concern about Medicaid entering the picture within 5 years.

  1. How does the VA look at gifts if I apply for Aid and Attendance?

The VA also has a look back period for gifting. While Medicaid looks back 5 years for any penalizing transfers, the VA looks back 3. Unlike Medicaid, the VA only penalizes you if your gift would have reduced your assets to below the asset limit. For example, the VA asset limit is currently $127, 061. If you have $125,000 in assets and gift $30,000, under VA rules there is no penalty because you were already below the asset limit. Not so with Medicaid, and the $30,000 gift would still be a penalizing gift under the rules.

  1. What if I gift the money to my kids and I end up needing it?

Ah, this one I get a lot. I advise my clients that if they want to gift but have worries, to consider gifting into an asset protection trust. This type of trust, properly drafted, would allow the assets to be gifted, but maintained during the lifetime of the giver (the grantor), with limitations on who can take withdraws prior to the death. Again, if considering gifting using an asset protection trust, seek out your elder law attorney to find out if this would work for you, and if you are comfortable giving up control of a portion of your assets while you’re alive.

  1. If I don’t gift during my lifetime, will my kids pay inheritance taxes?

No, your children won’t pay inheritance taxes, but if your estate exceeds the federal estate tax limit of $11.4 million, there will be an estate tax return to file. Any taxes due would be paid from your estate before distributions are made to your beneficiaries.

If you are considering making cash gifts to your family, it may be a good time to sit down with your elder law attorney and discuss options. Better to know now how gifting could affect you in the future should you need long term care and want to qualify for a state or federal benefit.

 

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