Last Minute Gifting Advice

I hate to put a damper on the biggest gift giving season of the year (the time between Hanukah and Christmas), but one warning could save major headaches down the road.

Many times seniors like to take advantage of the current $14,000 gift giving exclusion. This allows anyone, at anytime, to give up to $14,000 a year to as many individuals as they desire, without paying income tax or affecting their estate tax exclusion. The confusion and potential problem is that such gifts are not allowed under Medicaid rules, and could potentially limit when a nursing home patient would become eligible for Medicaid assistance.

A little background. Nursing homes today can easily run over $80,000 per year depending on level of medical care required. Few seniors have the income necessary to fully pay this kind of cost, especially if a stay at home spouse is involved. Assets are typically sold off to pay the difference. In the circumstances of an extended stay, many seniors will eventually rely on Medicaid to supplement the cost of care. However, Medicaid has strict financial requirements. Meaning you must spend down all but a very small amount of your assets before Medicaid will assist with the costs. Medicaid also considers any gifts given over the last five years as if they were still part of your current assets, and so will not start paying until additional costs equal to those gifts are incurred.

For example, Mrs. Smith gives $10,000 a year to each of four children every year for the past five years. She enters a skilled care nursing home facility costing $80,000 per year. Her Social Security and pension equal $20,000 a year, so she must liquidate $60,000 of savings each year to cover the cost. In three years she has exhausted her original $180,000 nest egg. Normally Medicaid would now step in and cover her costs over her $20,000 per year income. However, since she was still gifting the $10,000 to her children for two of the prior five years, Medicaid will not start until she incurs additional nursing home costs equal to the amount of those gifts, or $80,000. The children will be expected to pick up her nursing home tab for two years before Medicaid will begin payments.

While this is a simplification, formulas and state rules will come into play, the general point is valid. So while gifts are always nice, if you are receiving financial gifts from elderly parents or grandparents, you may want to put that gift into the bank, instead refurbishing the kitchen.

On a Positive Note
I can’t end without a more positive planning note. If you are planning on making gifts to charity, consider giving shares of appreciated stock directly. This way you avoid paying capital gains taxes, still receive the full charitable deduction, and a charity can cash in the securities without being taxed on the gain. Most charities have brokerage accounts established just for such gifts. If not we can make arrangements for them.

For more information on proper gifting techniques feel free to call and schedule an appointment for a free consultation.

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bill@401advisor.com • 937.434.1790

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Charles H. Dow Award Winner 2008. The papers honored with this award have represented the richness and depth of technical analysis.

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