By: Joan Reed Wilson, Esq.
With Thanksgiving around the corner and the end of the year fast approaching, many of you may be thinking about making gifts to your children and grandchildren. Who has heard that you can give away $10,000 every year to every one in your family without penalty? In my practice, I hear that A LOT. Is it true? I’m afraid not.
First, the good news. The law that most people are thinking of when they mention this is the Gift Tax Exclusion. It is part of the estate and gift tax laws and currently it allows you to give $15,000 per year per person. So you actually can give $5,000 more than what most people think, but the law was $10,000 for so long that that’s what many people seem to remember. Another piece of good news is that you can give that amount to ANYONE. It is not limited to your family members. And if you are married, you and your spouse can EACH give $15,000. So a couple can give $30,000 to each of their children, their children’s spouses, and their grandchildren and step-grandchildren (here’s where I’m hoping my parents read this blog) every year. They could also give $30,000 to their neighbor and their favorite waitress. What is the benefit of this law? It allows you to give this money away and not have to report it on a gift tax return or pay gift taxes on it. If your aggregate annual gifts are $15,000 or less per recipient, you do not have to file any gift tax returns or tell the IRS or DRS that you made this transfer. The gift is EXCLUDED from the gift tax reporting rules. (If you use pre-tax dollars from a traditional IRA or other retirement account, then you still have to report the distribution for income tax purposes.)
The exclusion was a big deal when the estate tax exemptions were lower, because it allowed people to transfer funds out their estates without having to pay taxes on the excluded funds. Currently the estate tax exemptions are over $11,000,000 on the federal level and $3,600,000 in Connecticut (and will be over $5,000,000 in January). Given these increases in the estate tax exemptions, most people do not have a taxable estate, so the exclusion has lost its luster in many respects.
Why then do I hear about it still? Because many people believe that the exclusion applies to Medicaid look-back laws as well. Spoiler alert…(here’s the bad news)…it does not.
Long-term care is very expensive. In Connecticut, the average cost of a nursing home is more than $13,000 per month. Live-in care costs about $6,000-8,000 per month. When long-term care needs arise, people can spend their life savings pretty quickly and often have to apply for Medicaid/Title 19 to pay for their care. The Medicaid application process includes a review of the applicant’s assets for the five years prior to the application for Medicaid. This is typically known as the 5-year look-back. If the State finds that the applicant gave away any money during the look-back period, the applicant could be penalized from receiving Medicaid for a period of time.
The gifts that are excluded from gift tax laws are NOT excluded from the look-back. Let me repeat that because people usually do not believe me the first time I break that news to them. Gifts made under the gift tax exclusion are NOT exempt from the five-year look-back. Think of it this way; the gift tax exclusion is an Internal Revenue Service/Department of Revenue Services (IRS/DRS) rule. The five-year look-back is a Centers for Medicare and Medicaid Services/Department of Social Services (CMS/DSS) rule. CMS and DSS do not care that the IRS and DRS exempt transfers from their reporting rules. CMS and DSS do not want people to give away their money and then ask the State to pay for their care.
So as you’re gathered around the holiday table this year, give your children and grandchildren love and affection, but think twice about giving them large cash gifts (yes, even you, Mom and Dad).