Transfers or Gifting of Assets

The $13,000 Annual Exclusion Gift: Many people have heard that there is a limit of $10,000 or some such limit on annual gifts. This is a rule from  Federal Gift Tax law, sometimes called the annual exclusion rule. This rule says that a person can give up to $13,000 to any number of people each year. (The amount was $10,000 per year for many years.) It is a “freebie” because the donor does not have to file a Gift Tax Return and the amount does not count against a person’s lifetime gift tax exemption or against the person’s estate tax exemption. For people whose estates are subject to the federal estate tax, this is an extremely useful way to avoid estate and gift tax on property given away under this rule. For people whose estates are not subject to estate tax, the annual exclusion gift rule avoids unnecessary paperwork on small gifts because there is no need to file a Gift Tax Return.

Gifts Greater than $13,000: There are occasions when people wish to make gifts larger than $13,000 per person. This is not prohibited. If a gift greater than $13,000 is given to any one person, the donor must file a Gift Tax Return and the amount over $13,000 counts against the person’s $1,000,000 lifetime gift tax exemption and their $3,500,000 estate tax exemption. However, even though Gift Tax Return must be filed, no tax will be owed unless the total amount given away exceeds $1,000,000. Example: Mom gives $52,000 to her four grown children. These gifts fall under the $13,000 exclusion. Mom does not need to file a Gift Tax Return. The gifts don’t count against her lifetime gift tax exemption or her estate tax exemption. Example: Mom gives $52,000 to her only daughter. She will need to file a Gift Tax Return (Form 709) by April 15th of the year following the gift; however, she will not owe any tax as long as her lifetime gifts that she has reported on the Gift Tax Returns do not exceed $1,000,000.

Do the People Receiving a Gift Owe Tax on its Value? No. The gift does not need to be reported to the IRS by the donee (gift recipient). [The exception would be that rare case where a person gives all of his money away, the amount is greater than $1,000,000, and the person (donor) did not pay the tax. In that case, the IRS will seek to recoup the taxes from the people who received the gifts.]

Gifts or Uncompensated Transfers under Medicaid Rules: Medicaid has its own rules which  vary somewhat between States. This is written from the perspective of Texas Medicaid Rules. The Medicaid is “means tested.” A person will be disqualified if he or she has too much income or too many resources.  Therefore, it only makes sense that these rules would limit or penalize gifts or uncompensated transfers when people try to impoverish themselves to qualify for Medicaid. In many cases it will take the experience of an Elder Law Attorney to wicker through multiple transfers and to determine when the penalty clock begins or what it will require to undo the penalty.

Example: Dad who is 85 and a widower is in need of nursing home care. He has $100,000 in countable resources, so he gives $99,000 away to his grown children to reduce his countable resources below Medicaid’s limit of $2,000. He then applies for Medicaid, but Medicaid asks whether there have been any gifts or uncompensated transfers in the last five years. (This is the “five year look-back rule.”) If there have been transfers, Medicaid says it costs $130.88 per day to provide care for a Medicaid recipient in a nursing home. Medicaid then divides the gift by $130.88 to come up with 764 days of penalty. The penalty does not begin until Dad is in a nursing home, applies for Medicaid, and would have qualified (this included Medical Necessity) but for the gift. Thus, Medicaid seeks to penalize gifts or uncompensated transfers with the idea of forcing the gift recipients to pay for Dad’s care.

Example: Dad sells his $100,000 home to his son for $1.00. Is this legal? It’s a gift of $99,999.

Example: Dad sells his $100,000 home to his son who signs a note or mortgage, but never makes any payments. Is this legal?  It’s a gift of $100,000 plus IRS would say that Dad owes  interest on the loan. 

Gifts or Transfers in VA Planning: The Veterans Administration does not penalize transfers as of yet even though the VA has limits on the amount of assets that a veteran or veteran’s widow can have and qualify for VA benefits. Thus, transfers may be useful in planning for VA qualification.

Gifting Issues – the “Step-up in basis”: Sometimes gifting an asset can create an income disadvantage for the recipient compared to inheriting the same asset. How does this happen?

Example: Let’s say that Mom owns Exxon stock that she paid $10 per share for or that she owns land that she paid $10 per acre for. If she gives the land or stock away to her daughter, the daughter’s basis in the property will be $10. If the stock or land is now worth $100 and the daughter sells it, she will owe capital gains tax on the difference between the sale price and her basis. If the tax on long-term capital gains is 15%, then she will owe $13.50 in tax when she sells the property (100  minus 10 equals 90 times .15 equals $13.50). On the other hand, if Mom dies owning the stock  or the acre when those assets are valued at $100, the asset will “step-up” in value to $100 at her death. After Mom’s death, when the daughter sells the stock or the acre, her basis will be $100. So, if the daughter sells the stock or the acre for $100, there will be no capital gains tax. (Currently, this law is in flux, but the “step-up” is expected to be renewed under the new estate and gift tax law which is expected in the next few months.)

Written in January, 2011.