You have probably heard from family or friends that you can give up to $10,000 per year without having to report or pay tax on it. As is the case with most legal and tax advice you hear from family and friends, it is well intentioned, but only partly true.
Pursuant to the Federal gift tax laws, you can gift up to $14,000 (up from $10,000) per person, per year (in 2013) without having to report or pay tax on it for Federal gift tax purposes. With gift splitting, a husband and wife can gift up to $28,000 per year per person without the necessity of reporting it for Federal gift tax purposes.
What you may not realize is that you can give more, much more, to your loved ones without paying any gift tax. In 2013, your gifts in excess of the annual exclusion amount are not subject to Federal gift tax unless your total lifetime taxable gifts exceed $5,250,000. For a married couple, with gift splitting, this amount is $10,500,000. For most Americans, you can give away everything you own and there will be no Federal gift tax.
But should you? Even though these gifts are not taxable for Federal gift tax purposes, in other circumstances, these gifts are fully reportable and countable. For example, you need to report any gifts you made over the last five years when you are in a nursing home and applying for Medicaid to pay for the nursing home care. Every single one of those gifts, no matter how small, must be counted.
For Medicaid purposes, there is no minimum gift which is excludable. Any gift you make within the five years immediately preceding the date of your Medicaid application are reportable and considered divestments.
These gifts will create a divestment penalty period during which Medicaid will not cover your nursing home care. That penalty period is calculated taking the sum of all countable divestments and dividing it by the Michigan Department of Human Services (DHS) divestment penalty divisor.
The divestment penalty divisor is determined annually using the average monthly nursing home cost in Michigan. The 2013 amount is $7,631.00.
For example, if you made a gift to your family of $25,000 in 2009 and applied for Medicaid for your nursing home care in 2013, then that gift would create a divestment penalty period of 3.3 months. During the penalty period, Medicaid would not cover your nursing home costs. Your family would have to cover those costs with their own money or use the gift money to pay for your care.
So, couldn’t you just give everything away today if you don’t think you will need nursing home care in the next five years? Yes, so long as you do not go into a nursing home and need to apply for Medicaid within five years of the gifts.
The good news is: You do not have to report any gifts made more than five years from the date you applied for Medicaid. The bad news is: You no longer have those assets for yourself or for your care. Your assets are now your children’s or others’ and are no longer available for your own needs. They are gone.
If you can guarantee that you will not need nursing home care in the next five years and that you will not ever have a need for your assets for the rest of your life, then go ahead and give everything away. If you are like most people, you will need your assets for yourself and/or your spouse. Most people do not want to give assets away unless it is absolutely necessary to protect those assets from nursing home spend down.
So what can you do? It used to be that you could make monthly gifts up to a certain amount that would not considered a divestment when you apply for Medicaid. You also could have purchased “Medicaid friendly” annuities that would be protected. These types of pre-planning are no longer appropriate.
If you are married and your spouse enters a nursing home, there are certain assets your spouse can gift to you. You can then transfer any assets in excess of the Medicaid spend down limits into a special solely for the benefit of spouse trust that is allowed by both Federal and State statutes. Those assets in the spousal trust would still be available to you for the rest of your life, but would not be considered countable for the Medicaid asset tests.
If you are single and enter a nursing home, you can similarly protect assets for your loved ones. You can gift approximately one-half of your excess assets to your loved ones which would create a divestment penalty period. You then use the other half of your excess assets to purchase a special “pension.”
This pension must be in the form of a certain Medicaid qualifying annuity or promissory note. The pension would be your income to pay for your nursing home care during the divestment penalty period. The entire gifted amount would be protected for your loved ones.
However, if you are in the nursing home, you may be incapacitated and be unable to personally do this planning and make these gifts. How do you make sure that those gifts can be made? The best way is to prepare and sign a durable financial power of attorney with certain instructions allowing gifts. That power to gift should allow your power of attorney agents to make these gifts to anyone, including themselves.
I often see financial powers of attorney that either have no power to gift or have a limited power to gift, such as a limit to the annual Federal gift tax exclusion or to a pre-existing gifting plan. With financial powers of attorney that either have no gifting powers or limited gifting powers, your agent cannot protect your assets for your loved ones. Your assets would have to be spent down for your nursing home care.
When preparing your financial power of attorney, be careful. We all have heard stories about children or grandchildren with powers of attorney who steal assets. Make sure that the person to whom you give these powers can be trusted.
It is also very important to discuss these matters with your loved ones. That way, everybody understands what your wishes are and what they need to do.
By: Matthew M. Wallace, CPA, JD
Published edited September 22, 2013 in The Times Herald newspaper, Port Huron, Michigan as: To gift or not to gift, that is the question