Q. I would like to give some money to my
children or grandchildren but I’m a little confused about how this would
affect my taxes or what would happen if I have to apply for Medicaid. I
have heard that I can give away $14,000 to my family members without
having to worry about any taxes. However I have also heard about a five
year lookback period for Medicaid if I give money to family members.
Gift giving, like most aspects of modern
life, is becoming more complicated. Most of us have been giving gifts all
of our lives – for birthdays, holidays, special occasions such as weddings,
graduations, and anniversaries – and our main concerns have been very
practical ones: how much can we afford to give, what should we give, and to
whom. Your question raises several other issues related to gifting that
often arise in estate planning, particularly where larger gifts are being
considered.
You are correct that you can give up to
$14,000 [2016] each year to a family member (or anyone else) without
having to report the gift to the IRS and without any tax consequences. The
$14,000 limit is called the annual exclusion amount and it is adjusted
for cost of living increases. For a married couple with two children, this
means that they could give up to $28,000 each year to each child without
worrying about the IRS. There is also an unlimited exception from the
federal gift tax for gifts that are made in the form of paying tuition
expenses or medical expenses, as long as the payments are made directly to
the educational or medical provider. Thus if you help your grandchild with
college expenses by paying tuition expenses directly to the college there
would be no tax issues to worry about. In another Question & Answer I discussed
Section 529 plans, which offer a convenient means of setting up a college
fund for a family member (or for non-family members as well). You can
contribute up to $14,000 each year to a Section 529 plan without any tax
implications, and you can even “bunch up” five years worth of contributions
in one year. If you set up a bank account for a minor child under the
Uniform Transfer to Minors Act (UTMA accounts), your deposits to the account
are treated as gifts to the minor child and are subject to the $14,000
annual exclusion limit. Keep in mind that when the child turns 18 (or age
21 if this was specified when the account was created), he/she is entitled
to withdraw the funds in the account.
If you go over the $14,000 annual
exclusion amount for the year you will have to report the gifts to the IRS
on a Form 709. However the good news is that you will not have to pay any
gift taxes until the total amount of your “excess gifts” (the amount in
excess of the annual exclusion amount) over your lifetime reaches
$5,430,000 [2015]. For those fortunate few who have to worry about gift
taxes, the gift tax is on the giver, not on the person who receives the
gift. This also applies to gifts in the form of an inheritance. The person
receiving the inheritance does not owe taxes on the gift (there is an
exception to this rule for “income in respect of a decedent” if, for example
you inherit an IRA). So for most people, except those with large estates,
gift taxes are not something that you have to worry about.
The tax rules related to gifting are
sometimes confused with the Medicaid rules, but the two are completely
separate. The Medicaid rules are much more restrictive and problematic,
especially for older clients who are worried about what will happen if they
have to go to a nursing home. There is a separate set of eligibility rules
for Medicaid coverage of long term care services, which includes nursing
home services as well as in-home services under the Home Help program and
the Home and Community Based Services program (the MI Choice Waiver
program). A person applying for Medicaid-funded long term care services
will be disqualified for a period of time if he/she has given away or
transferred assets for less than fair market value (divested assets) in the
five year period preceding the Medicaid application. The penalty period
begins to run on the date the person is otherwise eligible for Medicaid.
The length of the penalty period depends on the amount that was divested.
The Department of Human Services (the state agency that determines financial
eligibility) will add up all of the divestments within the lookback period
and divide that amount by the average private pay rate for nursing home care
($8,084 for 2015). For example if you gave away $50,000 within the
past 5 years, you would be disqualified from Medicaid for 6.19 months
($50,000 divided by $8,084). If the divestment was made more than 5
years prior to the Medicaid application then it falls outside the lookback
period and is disregarded. Unfortunately the trend of Medicaid rule changes
in the recent past has been to make the program more complicated and more
restrictive.