Be Careful About Gifting

The concept of “gifting”, or spreading gifts throughout one’s lifetime, has been a recognized as an effective strategy for reducing estate taxes. But, did you know that there is more to think about “gifting” than how it might impact estate taxes—especially for those people for whom estate taxes are not a concern?

So, what is gifting? Most people understand that gifting can be writing a check to the grandchildren for Christmas or birthdays.  Gifting can include paying another’s bills and may even include paying someone to provide services.

For federal gift tax purposes, someone can receive $14,000 per year from an individual giver without being subject to gift taxes. On the other hand, very different rules apply to gifts given in the past five years if one ever needs to ask the government for assistance.

Let’s say a couple gives their daughter $10,000 to purchase or remodel her house.  The amount is well under the $14,000 gift tax limit, so should not be a problem, right?

Let’s then say that 4 years later, one of them suffer a stroke, and needs to receive care in a long term care (LTC) facility such as a nursing home or assisted living facility.  If they can pay the bill ($3500 – $9000 per month) there is no problem at all.  But if they can’t afford such a monthly expense, and savings are insufficient, they may need to apply for Medicaid to pay for the care.  Medicaid is the long term care program for the poor, so they will find that there are restrictions on the total amount of money and other assets they can keep on hand. In addition, if they have given assets (e.g., money, land, a business) away in the past five years, those will be considered gifts and the amount will prevent them from receiving Medicaid, once they are impoverished. So, that gift to their daughter will be considered to be an asset they gave away and will impact when they become eligible to receive Medicaid.

Even if they pay someone privately to provide the long term care they need at home, it will be considered a gift when they need to apply for Medicaid unless they have proper documentation.  They need documentation to prove that the money paid was for services provided, and not a gift. This is the case regardless of whether the caregiver they pay is a family member or not—there needs to be proper documentation that the money paid is in exchange for care given, or they risk having it considered a gift.

Given all of this, it’s not difficult to understand that the monthly check a parent might give an adult child who is struggling financially would also be considered a gift, as would a child assuming operation and ownership of a family business or farm that is held in the parents’ name.

Medicaid requires documentation of finances from the past five years.  All gifts made in this time period will be counted. The total of the gifts is divided by the average monthly cost of a nursing home to determine how long a person could have paid for  care, had (s)he not given money (or other assets) away.  That is how long they will need to wait to receive Medicaid, even after impoverished.  Our government feels that it is unfair to give money away, and then want government funding to cover a budget shortfall.

I have a LTC insurance policy that will, along with my available income and assets, pay for my LTC.  If I can pay my bills when due, with my funds or insurance I own, I can make gifts to whomever I please in any amounts I want.  I will not have to ever ask the government for help through Medicaid when I need LTC.  What about you?

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