Gifting Issues

What are the issues about gifting?
What is Unified Credit?
Learn about the gift tax exemption, estate tax exemption, and more in this episode of Daily Wisdom!

Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm. Register via this link or give our office a call at 844-885-4200.

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Episode Transcript

Inherent Problems with Gifting

My 97-year-old mom transferred assets five and a half years ago. Are there gifting issues? What money should be used to pay for her care? Now she’s in assisted living.

The interesting thing is this money was gifted away five and a half years ago. So that’s important because of Medicaid has a five-year look back period. And I’m not necessarily a big fan of gifting because there’s some inherent problems with that. Technically, a gift tax form probably should have been filled out. If you gift to a son or daughter and they go through a divorce, lawsuit, creditor action, bankruptcy, long-term care, then that money could be potentially lost. If there’s a falling out, that money could be lost. You’ve given up control. So a lot of times to take advantage of this five-year look back period, we don’t look at gifts, but we look at special types of trusts, like a Castle Trust, where we can move the money into the trust, and then once we make it five years, everything inside of the trust would be protected and you could be in control.

So I know in this case, we can’t go back in time, but because mom gifted that money five and a half years ago, that money is free and clear from Medicaid. So if she were to go into a nursing home, then everything she gifted would be protected from that nursing home or Medicaid spend down. So if we’re looking at paying for her care now, I would not use the money that’s already been gifted, because that money is protected from the Medicaid spend down.

Now, going back in time, I probably wouldn’t have done a gift. I would have put it into a trust to protect it. But we can’t go back in time. So it’s already gifted. We can’t undo that. But the nice thing is that it is now protected from that nursing home or Medicaid spend down. So I would use mom’s current money, money that’s in mom’s name now, to pay for her care, because that money is not protected.


Gift Tax

Now, are there any gifting issues? If you do gift more than, this year it’s $15,000, you do have to fill out a gift tax form, but you can cut into your lifetime gift tax exclusion amount, which is tied to the estate tax. It’s called a unified credit, where your estate tax exemption is the same as your gift tax exemption. And right now the gift tax exemption or the estate tax exemption, your lifetime estate tax exemption is $11 million for an individual. And so is the gift tax exclusion. So if you were to gift $100,000 now, there’d still be zero tax. All you’d have to do is fill out that gift tax form to notify the government that you’re cutting into your lifetime gift tax exclusion amount.

Now, interesting thing, not that this is a question, but I was talking to a client this morning. They have about $12 million in assets. Tough problem to have, but they have an estate tax issue. So the interesting thing is that this $11 million exemption is set to become, when the Tax Cuts and Jobs Act ends, about 5 million. So they’re really going to have an estate tax issue. But what they could do is they could gift a portion of this to a trust and remove it from their estate now, and when the estate tax exemption drops down to 5 million, the IRS has said that for gifting purposes, we could still use that $11 million gift tax exclusion if we gift it now. So kind of off topic, but it was just an interesting little planning point that if you were to make gifts now to remove money from your estate, if you set it up correctly, even if the estate tax exemption and the unified credit drops in the future, you’ll be grandfathered in. The IRS actually gave us a private letter ruling on that.


The Real Issue

So getting back to the original question, are there really any gifting issues? Probably your mom should have filed a gift tax return five and a half years ago, notifying the IRS that she’s cutting into the exemption. But if she’s not going to have a taxable estate at the end of the day, probably not that big of a deal, because in the end she still would have owed zero taxes. You might have a gifting issue if you were to give that money back to mom. But if it’s less than $15,000, or if you’re married, $30,000 per year, you don’t even have to worry about it. So that’s the gifting issue.



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