Janet’s granddaughter, Grace, recently got accepted to veterinary school. Janet is thrilled at this huge accomplishment, and would like to give Grace a gift of $40,000 ($10,000 a year), to help her pay for school, so she wouldn’t have as many loans to repay when she graduates.
For Janet, the experience of losing her own mom to Alzheimer’s led her to think twice about how she wanted to handle her own estate planning. When her mother passed away, Janet got a nice inheritance from her, but by then, she didn’t need the money as much as she would have when she, herself, was going through school. The experience shaped her decision to leave her granddaughter her inheritance now, rather than waiting until she was no longer around.
With the lofty cost of education and the tough economy, like Janet, many of us are looking for ways to assist our children or grandchildren now, rather than waiting to leave them money and assets in our estate planning documents. If we choose to do so,what’s the best way to go about gifting money and assets to them, without incurring hefty taxes and jeopardizing eligibility for Medicaid? Read on and I will explain.
Should You Give Now or Later?
Though it may seem like a matter of preference, there are positives and negatives to early inheritances. What are the advantages and disadvantages when it comes to passing on money to your family while you’re still around to enjoy the experience?
Advantages to Giving Early
1. Potential tax benefits: For wealthy individuals (those who pass away with estates greater than $5.43 million), if you don’t give early, you will get hit with an estate tax of 40%. For these people, early inheritances are a great tool for shrinking an estate to avoid this tax, and to make sure that more of your money actually reaches your loved ones, instead of going to the government in the form of taxes.
2. You get to see it benefitting your loved ones: There can be great joy in giving to your loved ones while you’re able to witness the fruits of your gifting. Whether you’re bringing together a cruise,making the down payment on your child’s first home, or funding education for your grandchildren, many want to feel the satisfaction that comes with spending their hard-earned money on a good cause.
… and the Disadvantages
1. Gifting can affect Medicaid eligibility: Gift giving can be a risky venture for people who may need Nursing home care within five years. Why? Medicaid presumes that all gifts made in the 5 years prior to filing for Medicaid were made in contemplation of applying for Medicaid. Individuals seeking eligibility for nursing home long-term care Medicaid benefits must disclose all gifts made by the individual or his or her spouse within the prior 5 years. Medicaid presumes that gifts made within 5 years of the eligibility request date were made in order to qualify for benefits.
If you have a history of giving small weekly or monthly gifts to a charity, most Medicaid offices will not construe those to be disqualifying gifts. For instance, in Virginia, these types of regular gifts are not penalized so long as they are under $4,000 per year and there was a regular pattern of making this gift for years prior to applying for Medicaid.
So, for those who may need nursing home care within the next five to ten years must weigh the joy of giving against the potential cost of losing much-needed Medicaid benefits. For more information about gifting and Medicaid eligibility, read “Medicaid: The Perils of Gifting FAQ.”
2. You could come up short: Unless your own retirement and long-term care are healthily funded and planned, giving a gift now means you may come up short later on — which helps neither you nor your beneficiaries. This is why you should make sure your own financial needs are 100% taken care of before considering giving an early inheritance.
3. Early giving can spur family drama: A downside to early giving is that it may cause resentment among loved ones who aren’t (or feel they aren’t) the recipients of your generosity. If you’re in a complicated family situation, and you aren’t prepared to deal with the fallout, you may even want to reconsider your early inheritance plan.
Like most financial choices, giving an early inheritance isn’t always the right move. If it’s on your mind (or even if it isn’t), it’s important to consult a Certified Elder Law Attorney to help you decide which option can best help you provide for your loved ones without compromising your own financial security and Medicaid eligibility.
Seek Guidance When it Comes to Gifting
Be sure to make an appointment and consult with a Certified Elder Law Attorney, such as myself, to discuss any issues regarding gifting when it comes to your individual circumstances. In addition, with all of the frequent changes that take place in the tax laws, and even more frequent changes in Medicaid rules, I recommend that everyone should revisit their estate plans every year. The Farr Law Firm’s Lifetime Protection Program, ensures that your documents are properly reviewed and updated as needed, so that they will have the proper effect under the law.
To make an appointment for a consultation, please contact us:
Fairfax Estate Planning: 703-691-1888
Fredericksburg Estate Planning: 540-479-1435
Rockville Estate Planning: 301-519-8041
DC Estate Planning: 202-587-2797
About Evan H Farr, CELA, CAP
