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Giving away assets can cost you more than you think
Wouldn’t it be nice to help your adult children or grandchildren financially? Maybe give them a car or some money to help them buy a house? Or a piece of land to build on or start farming? “They’re gonna get it when I die,” you think. “Why not help them out now when I can watch them enjoy it?”
Giving gifts like these can actually be a costly mistake – for you and your family.
“But the government says you can give up to $17,000 a year without penalty,” someone told you.
Unfortunately, anyone who tells you that is only partly right. Gift-giving can affect three different types of taxes and your eligibility for long-term care benefits.
Gift Giving and Taxes
It’s true that you can give away up to $17,000 to any one person this year, without having to file a gift tax return. If you give away more than $17,000 to any one person this year, you do have to file a gift tax return. What most people don’t understand is that neither you nor the gift recipient owe any taxes unless you give away more than $12.92 million over the course of your entire lifetime and at your death.
A gift tax return is required any time you give away more than the annual limit only because the IRS is keeping track of all your gifts, plus the assets that get transferred when you die. If the total of all those gifts and death-related transfers is greater than $12.92 million, then taxes are due.
If you’re married, you and your spouse each get a $12.92 million exemption. So together, you may be able to give away nearly $26 million without owing any tax.
“Then I really don’t have to worry about making gifts,” you’re probably thinking.
Yes, you do!
Just because there will probably be no gift or estate tax due doesn’t mean your children won’t owe capital gains taxes on “appreciating assets” that you give them while you’re alive.
“Appreciating assets” are things that gain value after you acquire them. So if you buy real estate, or stocks, or mutual funds, and they gain value, capital gain taxes may be due.
Suppose you bought land for $3,000 an acre. You transfer ownership to your son while you’re alive, and it’s worth $7,000 an acre at that time. He sells it soon after you’re gone for $10,000 an acre. Because you gave it to him while you’re alive, he’ll owe capital gain taxes on the difference between your purchase price ($3,000 an acre) and his sale price ($10,000 an acre).
If you leave that same land to your son at your death, instead of giving it to him while you’re alive, he will owe no capital gain taxes. That’s because, for transfers when you die, the IRS looks at the land’s value at your death ($10,000 an acre), compared to your son’s selling price ($10,000 an acre). Since there’s no difference between the two, there are no capital gain taxes.
The key point: Don’t give away appreciated assets while you’re alive. Leave it to your heirs at death.
Gift Giving and Long-Term Care
There’s another good reason not to make gifts while you’re living.
If you ever need long-term care, gifts you’ve made within the five-year period before applying for long-term care benefits (Medicaid) will be penalized.
That’s because the government wants folks to use their own money, rather than taxpayer funds, to pay for long-term care. The State of Indiana discourages people from giving away assets in order to protect them. The penalty works like this:
The value of any gifts made within the past five years is divided by the average cost of one month in a skilled care facility. Today, that average cost of care is $7,167 per month. So, if you give away assets worth $71,670 less than five years before applying for benefits, the State of Indiana will make you pay for your own nursing home care for 10 months (The $71,670 gift, divided by the $7,167 average cost of care per month, equals 10.)
It makes no difference that the federal government allows you to give away up to $17,000 per person per year without filing a gift tax return. The gift tax exemption has nothing to do with the Medicaid penalty. Any gift above $1,200 per year can result in a Medicaid penalty.
Once again, the key point is this: Don’t give away assets while you’re alive. Leave it to your heirs at your death. You or your spouse may need those assets during your lifetime anyway.
Putting your assets into the right type of trust, however, is a legal way to protect those assets from long-term care costs and deliver them to your heirs when you die. Speak with an attorney who focuses on elder law and long-term care planning for more information.
This overview is provided as a public service, not as legal, financial or tax advice to any specific individual. Be sure to speak to a qualified attorney, financial adviser or tax specialist who can answer your questions, analyze your goals, and give personalized advice.
Michael and Adam Goss of the Goss Law firm are Greencastle attorneys who focuses on elder law.