Gift taxes, estate taxes, Medicaid planning, and more

by Jerrold Bartholomew

Many people have heard of the annual exclusion for gift tax, but there are several points on this issue that are easily confused. In order for an estate plan to be effective, various concepts must be taken into account. First, for most people gift tax will never be a concern. While it is true that there is a limit ($13,000.00 per person per year) that can be gifted each year without technically requiring a gift tax return, you must exceed $1 million in gifts above the annual exclusion during your lifetime before you will actually have to pay any gift tax. Estate tax will only apply to estates with more than $3.5 million in 2009 and there will be no estate tax in 2010. In 2011, the estate tax exemption is scheduled to go down to $1 million per estate. So these rules apply to very few people. The problem is that many people hear about these rules and believe that they apply to the Medicaid gifting rules.

Nursing home Medicaid rules in Michigan about gifting are completely separate from the tax concerns. For Medicaid purposes, any gifts made within five years of needing nursing home care will cause the state to deny Medicaid benefits for a period of time equal to the total gifts given divided by the average monthly cost of care. For 2009, that number is $6,362.00. So for example, if someone gave away $63,620.00, they would not receive state assistance with the cost of long-term care for 10 months.

On the often related issues issues of gifting, Medicaid, and taxes, it is very important to understand that giving away appreciating assets during your lifetime can have dramatic tax consequences. When an asset that increases in value is sold, there can be capital gains tax on the difference between the purchase price and the sale price. If an asset is given away at a person’s death, the person receiving that gift only has to pay a tax on the increase in value after the original owner’s death, not on the increase in value since purchase, regardless of whether the asset passes through probate or a revocable living trust. It is therefore important to consider tax consequences when doing any Medicaid planning. Gifting to a trust can typically eliminate the negative tax consequences of gifting during life while at the same time protecting the asset from the cost of long-term care.

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