By Tim Barkley. December 2015.
The text message was from Susan: “How much can my fiancé’s mom give away in a year?”
I called her back. Some things are best handled in person. “What’s up?”
“Thanks for calling right back! My fiancé’s mom wants to give money to her kids before the end of the year so she can get a tax write-off. I knew there was a limit of $10,000 or something. And Bobby’s worried about how much tax he’ll have to pay on what he gets.”
“Well … you have several issues going on all at once. First, if Mom gives Bob a gift, it’s not a tax deduction for her, and it’s not taxable to him. So if she’s giving to get a deduction, that might end the discussion right there. If Mom needs a deduction, she needs to give to charity.
“Now about how much she can give, there are two things she needs to keep in mind. One, she can give up to $14,000 per year to any number of recipients without filing a gift tax return or paying any tax. That’s called the ‘annual exclusion’ and it doesn’t change for 2016.
“The amount she gives away isn’t taxed when she dies, as long as she gives to her children or grandchildren. So there’s no ‘deduction,’ but there is a reduction in her estate.
“If she gives away more than $14,000 to any individual in one year, the excess would be a taxable gift. Let’s say she gave Bobby $100,000 this year. The first $14,000 would be covered by the annual exclusion, but the remaining $86,000 would count against her ‘lifetime gift exclusion.’
“Right now, the lifetime gift exclusion is just over $5.4 million. So she would have to file a gift tax return, but no gift tax would be due unless she gave away more than the total exclusion amount.
“The gifts covered by the lifetime exclusion count against her estate tax exclusion of $5.4 million. So if she made $400,000 of taxable gifts in her lifetime, her estate exclusion would drop to $5.0 million. That’s more than enough for most people, so most of us just don’t worry about it.
“Does that help?”
“Thanks. It does.” Pause. “I heard something about gifts and Medicaid. Do we have to worry about that?”
“Well, it depends. Medicaid is a government medical welfare program that guarantees basic care to the poor. What you’re probably referring to is the nursing home part of the program.
“Medicaid isn’t designed – nor could we afford – for the government to pay for nursing home care for everyone. It’s designed for the poor. But there are some people who have tried to make themselves look poor so they can get Medicaid to pay for their nursing home stay. They try to give everything to the kids so the government will pay for the nursing home.
“Giving large gifts – over $500 – within the five years prior to applying for Medicaid can lead to disqualification from Medicaid. The disqualification is one month for every $7,940 given away, so a gift of $100,000 leads to a disqualification period of about 13 months. So yes, making the kind of gifts we’re talking about is a problem. They can lead to Bobby’s mom never qualifying for Medicaid.
“But Bobby’s mom will probably never qualify for Medicaid anyway. A single person can’t get Medicaid unless her assets are spent down to under $2,500, except for a few exempt assets. And while I don’t know a lot about her situation, my guess is that if you had to sign a prenup to marry her son, her net worth is higher than $2,500.”
“A lot higher. But – and I’ll ask – but I don’t think she’s anywhere near $5.4 million.”
“That means that she doesn’t have to worry about the federal gift or estate tax under current law. The Maryland estate tax exclusion is $1.5 million this year, but rises to $2.0 million in 2016. It’s scheduled to increase to $3.0 million in 2017 and $4.0 million in 2018.
“In 2019 it’s supposed to equal the federal exemption. No one knows what that will be, because the federal exemption adjusts for inflation, but everyone assumes that in 2019 the federal and Maryland estate tax exclusion will both exceed $5.0 million.”
“Then I guess she doesn’t have to worry about gift or estate taxes.”
“Most people don’t. Now she just has to think about the ‘real’ issues of family and relationships. Large gifts can create more problems than they solve, and need to be coordinated with the estate and financial plan. She probably needs to chat with her advisors.”
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Attorney Tim Barkley
The Tim Barkley Law Offices
One Park Avenue
P.O. Box 1136
Mount Airy
Maryland 21771
(301) 829-3778
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