To Gift or Not to Gift

A familiar question is “Can I make gifts to my children?” Or, “Can I give my house to
my kids to protect it?” An initial question that should be asked is whether you have enough to live on and do those things in life that you want to do, because if you give away assets to your kids, they may not be there when you want it. Not because your kids are untrustworthy, but because bad things can happen to good kids. They can get sick, they can die, they can get divorced, and they might even get sued for a car accident. They cannot prevent any of those bad things from happening. So unless you have a fortune big enough not to worry about your own needs, gifting should only be done after considering your own needs first. After that you need to consider what assets should be gifted, the tax ramifications, and what happens should you need long term care.

IRA’s and other tax deferred money cannot be given away without paying income tax so those assets are not wise to gift. Stocks may or may not make sense to gift because if they have appreciated greatly in value, your child is not getting the full value, as capital gains tax will be due when the child sells the stock. Money is easily given, but is also easily spent. The house is often a couple’s biggest asset, but that is where you live, so a direct gift to children could put it at risk.

Gift taxes used to be very real concern, but the state and federal total gift and estate tax exemptions are so high that very few Connecticut residents will ever pay any gift or inheritance taxes. Everyone asks about the $15,000 gift tax exclusion and here is how it works. Anyone can give away up to $15,000 per person, per year to as many people as wanted without paying a tax, and without it reducing their lifetime limit. A parent with three children can give away $15,000 to each child every year and no taxes will be due. And a spouse can also do the same, so that is $30,000 per married couple per child. But here the rules are often misunderstood, because that is a tax law, not Medicaid law. Medicaid will penalize any transfer of assets to a child or anyone else if it is done within five years of an application for Medicaid for homecare or nursing home care. That puts a premium on advance planning.

Since the home is usually the largest asset with the fondest memories, saving it is
important to families. But if it is given directly to children who don’t live in the home, and the parents decide to move away or downsize, the children will have to pay a capital gains tax on the sale if the property has gone up in value over the years, which it probably has. That could be tens of thousands of dollars. One method that avoids the risks of capital gains tax, and the risk of the children dying or getting divorced, is to put the house into a Medicaid Asset Protection Trust.

The property is not in the children’s names, so if anything bad happens to them, it does not count as their property until the parents pass away. If done with the proper tax provisions, each parent will still be considered the owner in the eyes of the IRS, and each will keep the $250,000 exemption from capital gains taxes, or $500,000 above what they paid for the home. In addition, if the parents die with the home in the trust, the IRS law increases the value of the property to the value on the date of death, and the children do not pay any capital gains tax on up to that amount.
Another benefit is that the five-year Medicaid clock starts to run on the gift of the house into the trust so it will be protected under the Medicaid rules. The key part of the rule is that the parents cannot have the right to the assets in the trust. The proceeds can be used to buy another house, or condo, or given to the children, but the parents cannot be given the money from the sale.

A big advantage is that no individual owns the property in the trust, so if a child gets
sued, or dies or divorced, the property is protected because neither the children nor the parents own the property. The trust owns it. The two downsides are that the assets in the trust cannot go back to the parents, and it may not be possible to get a reverse mortgage. Gifting away property depends on each family’s age, health, size and kind of assets, capital gains taxes, and the potential need for long term care in the future. It should not be done without sound legal advice based on your family’s circumstances. If done right, it can save inheritances for the children and grandchildren, avoid probate, avoid capital gains taxes on sale and not have the trust assets count on a Medicaid application.