A few days ago I met with a new client whose elderly relative had given out $12,000 gifts per person to a set of favorite relatives about 4 years ago because someone at the bank told her that if the gifts were limited to this amount $12,000 it would not be counted against her if she had to go to a nursing home. You would not believe how often this incorrect legal advice is given out, often by people who are not even lawyers. I can’t even count the number of clients I’ve met with over the years who asked me about this and were really surprised to hear that this is not true.
What’s it all about? Under the Internal Revenue Code (IRC), the federal government has a unified estate tax and gift tax system. IRC §2010(c)(3).Each year, a person can pass on a certain amount of wealth at their death without there being any estate taxes, and if they make gifts during their lifetime, those gifts will generally chip away at this “exclusion” amount. IRC §2503(b). In 2014, the exclusion amount is $5,340,000 in 2014. An exception to the gifting rule is that a taxpayer can give away up to a certain amount per person per year to as many people as they want to, without having to report it to the IRS and without the gift chipping away at the estate tax exclusion amount. This is typically referred to as the “annual exclusion amount” or an “annual exclusion gift.” For years it was $10,000 per person per year, and then it began to go up. Presently $14,000 per person per year is the 2014 amount.IRC §2503(b). For IRS’ FAQ’s on gift taxes, look at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes
Read more and find IRS publications on this at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Forms-and-Publications-Estate-and-Gift-Tax
The vast majority of estates never come near the federal estate tax exclusion amount, but everyone seems to be familiar with the annual exclusion gift amount.
These rules have nothing to do with the rules for Medicaid eligibility. When your beloved mother with Alzheimers Disease or other advanced dementia runs out of cash and applies for Medicaid to pay for her nursing home costs, a 5-year look-back will be done and there will potentially be a disqualification penalty for every gift that was made regardless of whether it was “below the annual exclusion amount.” A good legal strategy will be needed to protect their interests if it turns out that gifts were made a few years before that application is to be filed. There is a complex web of rules, and each problem needs individual analysis. If long-term care is foreseeable, forewarned is forearmed: get elder law advice before embarking on any type of gifting plan.
For individualized asset protection planning and legal assistance with Medicaid eligibility and appeals, contact 732-382-6070