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 $50,000.
If the property was inherited, the tax would be either nothing or next to nothing.
Asset protection for Medicaid is complicated and requires the experience and knowledge of a special needs 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. Read more about how essential it is to plan carefully for the disabled person in your life in our article, The Perils and Pitfalls of Do-It-Yourself Special Needs Planning
Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”