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Sep 2011
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September 01, 2011

Estate Planning Tip: Gift Taxes


Common Misconceptions About Gifting

There are a lot of common misconceptions about gifting assets among the general public and even among professionals.  Below are some categories of misconceptions and common questions that typically result from these misconceptions.

Those who are completely unaware of any gifting rules:

  • Common Question #1 - Can’t I just give away all of my assets to my children?
 
Answer:  You can but there could be adverse consequences such as an obligation to file a gift tax return, gift taxes or capital gains tax consequences and Medicaid disqualification.

  • Common Question #2 - How can the government tell me what I can do with my own money?  How will they ever know?
 
Answer:  It may feel like the government is telling you what to do but you are still free to gift assets.  There is just a potential gift tax imposed (to defend the estate tax base) and potential Medicaid penalties (to limit eligibility and reduce costs to the Medicaid program).  Audits are the tool used by the IRS and Medicaid agencies to discover unreported gifts.

Those who are vaguely aware of the gift tax rules and assume they apply to Medicaid:

  • Common Question #1 - Isn’t it true I can only give away $13,000 per year? 
 
Answer:  That is the amount that is excluded from gift tax each year and for which there is no gift tax return requirement.  You can give away more in a single year as long as you file a gift tax return. 

  • Common Question #2 - If I give any gifts to my children, won't they have to pay a lot of taxes? 
 
Answer:  Most donors end up paying little if any gift tax due to the $13,000 annual exclusion and the lifetime gift exemption (currently $5,000,000).

Those who are aware of Medicaid gifting rules, but are misinformed and confused:
 
  • Common Question #1 – Doesn’t Medicaid make it illegal to give away more than $13,000 per year? 
 
Answer:  Medicaid doesn’t care about the $13,000 annual exclusion.  That is a gift tax rule.  You can become ineligible for Medicaid by giving away less than $13,000.  However, it’s not illegal to give away any amount. You just have to consider the consequences.
 
  • Common Question #2 - If I've made any gifts in the past 5 years, doesn't that mean I can't qualify for Medicaid?

Answer:  You can still qualify but there will probably be a period of ineligibility.  The ineligibility period doesn’t start to run until you otherwise qualify for Medicaid, meaning that you are out of assets.  For this reason, gifts within 5 years of a Medicaid application are a serious problem that requires legal advice.

 

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