An individual can gift $13,000 per beneficiary per year without incurring gift tax liability. Seniors often gift $13,000 or less because they think that amount is “legal.” However, such gifts can eliminate or delay potential eligibility for Medicaid.
The annual exclusion is set by the Internal Revenue Service and has been increasing from the $10,000 per year that was the law for many years. The exclusion is a valuable estate-planning device used by the very wealthy in an effort to reduce the size of their taxable estates. By passing on gifts annually to children and grandchildren, wealthy individuals shield family wealth from taxes.
Every taxpayer has a lifetime “unified credit” from federal estate and gift taxes of $3.5 million. The annual exclusion has little relevance to persons who have less than $3.5 million because they will not be paying estate or gift taxes in any event. But attempts to utilize this exclusion can be extremely detrimental to seniors who have less than $3.5 million and who may need nursing-home care in the future.
Gifts of any size cause ineligibility periods for Medicaid coverage. The Deficit Reduction Act of 2005 made gifting rules more onerous than they were previously. Now ineligibility periods do not begin until a person has applied and is otherwise eligible for services. So, if gifts are made and an applicant’s assets, income and health change enough that he becomes eligible for Medicaid, he will not be able to receive the critical benefits right away. He must wait until the ineligibility period passes, during which time he may not have resources to pay for care. This rule can be devastating to a family who cannot return the gift.
Asset preservation in anticipation of long-term care is possible with the use of certain asset protection restructuring, however, asset preservation cannot be accomplished effectively through annual exclusion gifting.
Jill Burzynski, of Burzynski Elder Law, is the only board-certified elder law attorney in Collier County. She can be contacted at firstname.lastname@example.org or 239-434-8557.