December is the season of giving. It is also the time when I get the most questions about when to give, how much to give, and what the effect of that giving may be, on both my clients as well as their children, grandchildren, and other beneficiaries of their generosity. So this week, I will focus on giving.
Often I am asked, “Is there a limit, like $10,000 or $14,000, on the amount you can give someone in a year? Doesn’t something bad (like taxation) happen if you give more than that?” Actually, unless you are very wealthy, having assets in excess of $5,000,000, the answer is NO. There is no Massachusetts gift tax. The federal gift tax is related to the federal estate tax system, which allows each of us to give away, either during life or at death, a certain amount of assets estate and gift tax free. In 2013, that amount is $5,250,000. It is indexed to inflation and will increase to $5,340,000 in 2014.
In addition to the exemption amount discussed above, there is an amount called the annual exclusion that each of us can use to make gifts annually to anyone and to as many people as we want. The annual exclusion amount used to be $10,000, but it has been increased over the years due to inflation. In 2013, it is $14,000 and will remain at that amount for 2014. If, in any one year, you give someone more than the annual exclusion amount, then the excess gift gets reported on a gift tax return and is effectively subtracted from the $5,250,000 that you can leave tax-free at your death.
If, like most of my clients, you are an older person whose total assets do not exceed $5,250,000, then unless you hit the lottery or otherwise get a lot more wealthy, you can literally give away all your assets to any one or more individuals you want, this year or anytime, without incurring any gift tax, and without causing your estate to incur any federal estate tax later. And because Massachusetts has no gift tax, this gift will have the effect of also reducing any Massachusetts estate tax your estate may have to pay.
There is only one caveat to making gifts: Hope that you will not need nursing home care in the next five years. If you do and you try to qualify for MassHealth (the Massachusetts version of the federal Medicaid program which pays for nursing home care for qualified applicants), you will be asked whether you made any gifts within five years prior to the date on which you are trying to qualify. If you did, those gifts may cause you to be disqualified for a period of time roughly equal to the period during which those gifts could have been used to pay privately for the nursing home care. I say “may” because that is only the case if it can be shown that one of your purposes in making the gift was to later qualify for MassHealth. No gifts made more than five years before you want to qualify for MassHealth are reportable.
So, for tax purposes, you can give as much as you want, to anyone you want, at any time you want, unless you have substantial wealth. If you are wealthy and are concerned about giving, talk to your financial planner, your accountant, or your estate planning attorney. For MassHealth purposes, the sooner you make the gifts the better. If you give away $1 million before January 1, 2014, that gift will be non-reportable after Jan. 1, 2019. The $14,000 per person per year exclusion for gift tax purposes is completely irrelevant for MassHealth qualification purposes. For gifts made during the five-year lookback period, MassHealth caseworkers will typically disregard gifts of less than $1,000, although the MassHealth regulations allow challenges to gifts of any amount. Within the five-year lookback period, the older the gift, the more likely it is to withstand scrutiny. MassHealth also tends to disregard gifts that are made in similar amounts every year, such as holiday gifts to family members or gifts for things like tuition payments for grandchildren over several years, especially if the gifts began more than five years before you are trying to qualify. However, there are currently no fixed or absolute rules on this, so you are often at the mercy of the individual MassHealth caseworker assigned to your case.
A bill is currently working its way through the Massachusetts state legislature that would change a lot of this uncertainty by establishing some predicable rules regarding how gifts will be considered for MassHealth purposes. I’ll be discussing that bill in my next post. In the meantime, if you have any questions on any of this, please email me at firstname.lastname@example.org. I’ll answer your questions offline or, with your permission, in this blog.