Considerations When Making Lifetime Gifts

Gifts Taxes.
Each U.S. citizen may give up to $5.34 million (combined taxable lifetime gifts and bequests at death) in property without incurring a tax, by using federal estate and gift tax credits. As long as your total gifting stays below the credit amount, neither you nor the recipient of the gift will need to pay gift tax. This exclusion amount of $5.34 million is subject to periodic adjustment related to the cost of living index and is always subject to adjustment, up or down, by Congress.

Gifts to a Spouse.
Gifts of property to a spouse are not taxable because they qualify for the Marital Deduction, unless the use of the gift is too restricted or is to a non-U.S. citizen spouse. In the case of a gift to a non-U.S. Citizen spouse, a limited exemption from the tax is available. Gifts to a spouse which qualify for the Marital Deduction do not count toward your total $5.34 million credit.

Annual Exclusion Gifts..
Every year, each of us can make a gift of cash or other property valued at $14,000 or less (this amount is adjusted periodically based on a cost of living index), to each recipient of our choice (e.g. children, grandchildren, friends). There is no limit to the number of recipients and annual exclusion gifts do not use any of the tax credits mentioned above. Married couples may give up to $28,000 per year, per recipient, when they join in making the gift (though an informational gift tax return may need to be filed). Some property will not qualify for this exclusion.

Gifts to Charitable Organizations.
Gifts of property to qualified charitable organizations are exempt from the Gift Tax and in many cases will give rise to an income tax deduction. The amount of the income tax deduction will depend on a number of factors, including one’s tax bracket and the property given to the charity. The U.S. Tax Code defines which organizations will qualify a gift as tax deductible.

Gifts for the Benefit of Another Person.
Payments made directly to a qualifying educational institution or to a qualifying healthcare provider, for the benefit of another person (e.g. child or grandchild), are not taxable and will not count against the Annual Exclusion Gift amount of $14,000, described above.

Gifts to a 529 Plan.
Tax free gifts may be made to a “529 Plan.” A 529 Plan is a State sponsored, tax favorable way of paying for educational expenses. Qualifying educational expenses include tuition, fees, books, room and board, supplies and equipment (e.g. a computer) necessary for attendance at colleges, community colleges, trade schools and graduate schools which are eligible for federal student aid programs, and even at some accredited international schools. The creator of the Plan may retain control over the form of the investments in the Plan. Income earned on the investments grow on a tax deferred basis. Distributions from a 529 Plan for qualified college expenses are free of gift tax. Named after Section 529 of the Internal Revenue Code, 529 Plans have distinct advantages over traditional college savings plans. Gifts to a 529 Plan count toward the Annual Exclusion limit, which limit is currently set at $14,000 per year (see above). The law does allow for some front loading of the gifts to a 529 Plan.

Income Tax Consequences.
If you choose to make a gift of an asset during your lifetime (rather than leaving it to an heir upon your death), there may be income tax consequences for the recipient, in the form of capital gains tax. When certain assets (such as stock or real estate) are sold, the difference between the sale price and the “tax basis” is a capital gain, which may be subject to tax. The “tax basis” of an asset is generally equal to the original purchase price. When you give an asset away, the recipient of the gift maintains the same “tax basis” that you had before you made the gift. For example, if you bought a lake home 30 years ago for $50,000 and you give it to your child, the child’s “tax basis” in the property will be $50,000. If the child then sells the property for $300,000, the child will need to report a $250,000 capital gain on his/ her personal income tax return. Assets which are inherited after death receive a special “step up,” so that the tax basis is equal to the value of the property as of the date of death. In our example, if you left the lake house to your child in your Trust or Will, and it was worth $300,000 at the time of your death, then the child’s “tax basis” in the property would be $300,000 and if the child sold the property soon after your death, they would likely have little or no capital gain tax to report.

Medicaid Concerns.
Medicaid (not to be confused with Medicare) is the only governmental program that pays for long term nursing home care. When a person applies for Medicaid benefits, they will be asked whether they (or their spouse) have made any gifts within five years of the date of the application (this is the so-called “5 year lookback” rule). If a gift was made within 5 years, then a penalty period will apply, during which time the applicant is not eligible for Medicaid benefits. This can have serious consequences for the applicant in the nursing home and his / her spouse. Regardless of the tax issues, if an individual (or his/her spouse) may need nursing home care in five years, then careful consideration should be given before making a gift in any amount. Only gifts to a spouse are exempt from this rule. Other recipients of such a gift may be personally liable for any unpaid nursing home bills, up to the amount of the gift.

© Annis & Zellers, PLLC
This material is introductory and does not constitute legal advice. Please consult with your lawyer for estate planning services based upon your specific circumstances.