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The Gifting Season is Here: What to Know Before You Give

estate planning bucks pa

We’re thinking a lot these days about gifting, and not just because the holiday shopping season is upon us.

Gift giving is an act of kindness, a way to demonstrate our love and affection for people, but it’s also an essential tool in the world of estate planning.

What do we mean? Well, you might want to give away assets while you’re still alive so that they aren’t included in your estate and open to taxation after your death.

We understand this impulse. It not only makes financial sense, but you’ll get to see your loved ones enjoy your gifts. However, it’s important to think about the tax implications that might apply before you act.

What does the IRS say about gifts?

The IRS defines a gift as a voluntary transfer of property from a donor to a beneficiary without “adequate consideration.” In other words, without expecting anything in return.

You can gift gifts of up to $15,000 each year to as many people as you choose without filing a federal gift tax return, while a married couple can make joint gifts of double that dollar amount in a given year.

The $15,000 limit does not apply to charitable giving or gifts one spouse gives another. In those situations, there’s no limit to how much you can give. Paying someone’s medical bills or tuition is also excluded.

According to the IRS code, taxpayers are granted a lifetime $11.18 million lifetime exemption from federal estate/gift taxes. Thus, unless you give away more than that amount, you won’t owe any gift taxes.

Gifting and Medicaid

Although that $15,000 you might gift to someone this year would be protected against the gift tax, you’d still be liable for Medicaid’s five-year look back penalty.

When people apply for Medicaid, they need to demonstrate that you don’t have enough of your own assets to pay for care.

Medicaid will look at the last five years of your finances and can penalize you for any gifts or asset transfers made during that time.

The penalty works like this: For every $10,000 you gave away, that’s one month you’ll be ineligible for Medicaid. So if someone gave away $150,000 in the year before they applied for Medicaid, they’d have to wait more than a year to become eligible.

You might be able to escape penalties if you can show that you didn’t simply give the gift to apply for Medicaid.

This can be tough to prove, but you can avoid the penalty if you can show that you were in good health – and therefore didn’t expect to need long-term care – at the time you made the gift.

You might also be able to avoid the penalty if you can show you have a history of giving or that you had significant other assets when made the gift.

We would advise consulting with an elder law attorney or a tax professional before making any large gifts.

And if you’ve given a gift in the past few years and are worried how it might affect your Medicaid eligibility, or if you’re considering giving a gift, the experts at Gummer Elder Law can help keep you on the right path.

Contact us today to learn more.