We often direct clients to transfer assets out of their respective names in furtherance of an overall elder law plan. Generally speaking, beginning January 2008, in order to be eligible for Medicaid, an individual cannot have more than $4,350 in assets. Accordingly, the first prong of Medicaid planning entails the divestment of one’s assets through transfers to a trust, one’s spouse, relatives, and/or friends.
Clients often confuse the rules regarding transfers for Medicaid planning purposes with those regarding estate and gift taxes. Many erroneously believe that transfers of $12,000 or less to an individual have no effect on Medicaid eligibility.
However, such gifts will in fact be deemed a “transfer” for Medicaid purposes and will be subject to the general look back and penalty rules (a penalty will ensue depending on the amount transferred). The $12,000 transfer, however, will not subject the donor to any gift or estate tax ramifications.
Generally, gift taxes are imposed on gifts of money and/or property when the donor does not expect to receive something of equal value in return. There are, however, some exceptions to the imposition of the gift tax. Firstly, as mentioned above, each individual is entitled to gift $12,000 annually to as many recipients in a calendar year as he/she chooses.
A married couple can therefore give any individual up to $24,000 provided the gift is from both spouses. A gift of $24,000 is not subject to gift tax because the law provides for a $12,000 “annual exclusion” from this tax for each individual. In addition, tuition or medical expenses that are paid directly to a medical or educational institution on behalf of someone else are exempt from the gift tax. Further, gifts to one’s spouse are also exempt. Finally, certain gifts to political organizations and gifts to charities are exempt.
Even if a gift does not fall under any of the aforementioned exceptions, it still might not be subject to a gift tax because each individual is entitled to lifetime exclusion. The exclusion allows an individual to give $1 million away during his lifetime, gift tax-free. The exclusion is ultimately subtracted from the gift taxes one would otherwise owe. If an individual makes a gift that exceeds $12,000, this amount will use up a portion of the $1 million lifetime exclusion and will reduce the available gifting for future years.
The filing of a gift tax return is required for any year in which one gives a gift that exceeds the annual exclusion amount of $12,000. For example, if an individual gives a first time gift to another in the sum of $100,000, he will be required to file a gift tax return for the $88,000 excess, but a tax will not be due. Such gift will reduce the taxpayer’s available lifetime exclusion. In this scenario, the gift tax return is strictly for informational purposes. Whether a gift tax is ultimately due will depend on whether the individual made gifts that aggregate over $1 million dollars (over and above any annual gifts of $12,000 or less) during his/her entire lifetime. This discussion relates to federal gift taxes only. The New York State gift tax was repealed several years ago.
Hopefully, being informed will alleviate the concerns of those who wish to give, but are hindered because of unwarranted fears of instant taxation. Of course, a plan of gifting should be done under the supervision of an elder law/estate planning attorney.
Ronald A. Fatoullah, Esq. is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts and wills. The firm has offices in Forest Hills, Great Neck, and Brooklyn, NY. Fatoullah has been named a “fellow” of the National Academy of Elder Law Attorneys and is a former member of its Board of Directors. He also serves on the Executive Committee of the Elder Law Section of the New York State Bar Association. Fatoullah has been Certified as an Elder Law Attorney by the National Elder Law Foundation. Fatoullah is a co-founder of Senior Umbrella Network of Queens. This article was written with the assistance of Debby Rosenfeld, Esq., an elder law attorney at the firm. The firm can be reached by calling 718-261-1700 or toll free at 1-877-ELDER-LAW or 1-877-ESTATES.
*Certified as an Elder Law Attorney by the National Elder Law Foundation.
