Will Making a Gift Conflict with Medicaid?
People usually make gifts for three reasons—because they enjoy giving gifts, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise.
The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.
The current lifetime gift tax exemption is scheduled to drop to $5.49 million per person after 2025, unless Congress extends the higher exemption, which seems unlikely.
The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.
People often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.
Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception.
For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to a trust, or giving away partial interests.
The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.
Gifting can have serious capital gains tax consequences. Gifts of real estate property to another person are given with the giver’s tax basis. When real property is inherited, the property is received with a new basis of fair market value.
For gifting high value assets, the difference in tax basis can lead to either a big tax bill or big tax savings. Let’s say someone paid $50,000 for land 40 years ago, and today the land is worth $650,000. The appreciation of the property is $600,000. If the property is gifted while the owner is alive, the recipient has a $50,000 tax basis. When the recipient sells the property, they will have to pay a capital gains tax based on the difference. In other words, the recipient will have $600,000 of taxable capital gain income, something that could have easily been avoided with proper tax planning.
If the property was inherited, or held in a certain way to obtain the “step up” in tax basis, the tax would be either nothing or next to nothing.
You can have your cake and eat it too. A good estate, tax, and asset protection plan is available if you seek out a competent Board Certified Estate Planning and Administration Specialist and Board Certified Tax Law Specialsit. Medicaid planning is complicated and requires the experience and knowledge of an elder law attorney. What worked for your neighbor may not work for you, as we don’t always know all the details of someone else’s situation.
BOOK A CALL with me, Ted Vicknair, Louisiana Board Certified Estate Planning and Administration Specialist, Louisiana Board Certified Tax Law Specialist, and Louisiana CPA to learn more about estate planning in Louisiana, incapacity planning, and Louisiana asset protection.
If you liked this article, “Will Making a Gift Conflict with Medicaid?” read also these additional articles: Does a Beneficiary have to Pay Taxes on 401(k)? and The Risks of Creating Your Own Estate Plan and Is A Medicaid Planner Right for Me? and Alert: Scam Targeting Medicare Recipients
Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”