Ethan R. Okura
Hawai‘i Herald Columnist
Most of my clients have heard that you can give away $10,000 per year to anyone without any consequences. That’s not quite correct. Other clients say they heard that you should consider giving away your assets to your children and/or other loved ones five years before you might need to enter a nursing home. Therefore, many of them believe that they should start giving $10,000 per year to each of their children and grandchildren and/or other loved ones. For almost everyone, that’s not good advice.
In order to understand why it’s not good advice, we need to clarify the difference between Internal Revenue Service gift tax laws and those related to qualifying for Medicaid for nursing home costs.
First, you need to understand that IRS gift taxes and IRS estate taxes are a unified system. You have an exemption for estate taxes that allows you to pass away with up to $5,430,000, tax-free. Because it is a unified system, you can also use up some or all of that $5,340,000 estate tax exemption before you die to cover gifts you make during your lifetime without paying any tax. In addition to the $5,340,000 exemption, you are also allowed to give away up to $14,000 to each person each year without using up any of that $5,340,000 estate tax exemption. (The $14,000 is called the annual exclusion. It was previously $10,000 per person per year and is adjusted for inflation each year such that the exclusion is now $14,000 in 2015.)
Since you are allowed to give away up to $5,430,000 over your lifetime without any gift tax, 99 percent of the population will never have to worry about estate or gift taxes. If you don’t have $5 million dollars or more in assets and you don’t expect to ever have $5 million dollars in assets by the time you die, you will never use up all of your gift and estate tax exemption — even if you give away everything you own all at once. So, you can give away more than $14,000 and not worry about paying a gift tax. This is why, for most people, limiting themselves to gifts of $10,000 or $14,000 per year makes no sense.
Even though you can give away $14,000 per year to each person with no IRS gift tax consequences, any and all gifts you make will create a penalty in the five-year look back period for nursing home Medicaid qualification, even if it is under the $14,000 amount. Therefore, if you would like to reduce your assets to plan for nursing home Medicaid qualification, it makes more sense to give away everything you’re willing to give away all at once to start the five-year clock ticking rather than slowly giving away only $14,000 each year and spreading out those gifts over multiple years, which would delay your future Medicaid qualification. You can also keep more control over your assets and protect them better if you give the assets to a properly drafted irrevocable trust rather than give the assets directly to your children or other loved ones.
If you have more than $5,430,000 in assets, there are better ways to leverage the $14,000 annual exclusion gifts than by just giving away cash. A competent estate planning attorney can help you utilize family limited partnerships, LLCs, irrevocable trusts and other strategies to protect your estate from gift and estate taxes.
Finally, the most important thing to have in place, whether or not you are ready to start gifting assets, is your financial durable general power of attorney and, in your revocable living trust, the right to gift your assets to your family members and/or loved ones so that if you become incapacitated, your agent can give them away on your behalf when you are no longer able to do so yourself. It’s important that you not limit this authority for your agent to make gifts to only $14,000 per year. For Medicaid and estate tax planning purposes, it is important that your family members have the power to give away large amounts of your assets during your incapacity in order to protect those assets from taxes and nursing home costs. Be sure to have a Medicaid planning specialist review your documents to make sure that your assets will not become trapped should you become incapacitated.
© OKURA & ASSOCIATES, 2015
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.
This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.