If you are creating an estate plan because of ill health or a loved one's incapacity, it may be tempting to simply give away as many assets as you can during your lifetime. However, making large transfers can have serious tax consequences and also affect your Medicaid eligibility, forcing you to pay out of pocket for some or all of your late-in-life care. That said, there are some ways that gift-giving may be beneficial—or even preferable—during the estate and life care planning process.
Gifting Strategies to Benefit Your Heirs and Your Future Care
In order to discourage late-in-life gifts given to avoid estate taxes, the federal government imposes a tax on large gifts of money or valuable property. The federal government also has rules about how much income and available assets a person may have before they are excluded from Medicaid benefits. With so much at stake, it's vital that you speak with our experienced Florida estate planning attorneys before making any large transfers.
We can advise you on some of the most effective ways to give gifts, including:
- Meeting the yearly exclusion limit. It's possible to give multiple gifts without paying gift taxes, as long as each person receives less than the yearly exclusion limit ($15,000 in 2021). The exclusion "resets" each year, so you could give someone $15,000 in 2021 and the same person another $15,000 in 2022. If you're married, each spouse is entitled to the limit, meaning a married couple can gift assets worth up to $30,000 to each recipient of their choice.
- Using your lifetime exemption. In addition to the yearly gift cap, there's also a lifetime exemption on gifts for each taxpayer. The lifetime exemption is currently at $11.7 million for 2021, and each gift you make over the $15,000 annual limit throughout your lifetime will be counted toward the gift tax. If you incur gift tax in any one year, you can either pay the gift tax on the overage or apply the gift toward your lifetime exemption.
- Gifting before the Medicaid lookback period. An irrevocable asset protection trust is useful in many ways, including holding your assets for your heirs while shielding them from being used to pay for nursing home care. The earlier trust is created, the more likely it is that you can enter the nursing home immediately rather than waiting some (or all) of the five-year loopback period.
- Exploring other types of trusts. There are many different types of trusts, and each one offers unique benefits depending on your circumstances. For example, a Qualified Income Trust can help when a Medicaid applicant's income exceeds the monthly income cap, while a Pooled Trust can help Medicaid applicants who have special needs.
- Forming a family LLC. Some people may give away priceless heirlooms or valuable jewelry instead of money, not realizing that gift tax exclusions apply to both cash and non-cash gifts. The IRS imposes taxes on tangible property (such as antiques, jewelry, stocks, or bonds) using the asset's fair market value, which can quickly put you over the limit. One way to get more from your exemption value in this case is to form a multi-member LLC as the "owner" of family assets. Any gifts given to the LLC do not go directly to heirs, but are counted as membership interests in the company. Since you retain sole management rights over the LLC, the assets in the trust are given a reduced market value—and the reduced valuation is the amount counted toward gift tax. Assets in an LLC could be discounted up to 40 percent, giving you nearly twice the value of your yearly exemption compared to giving gifts outright.
Speak to a Lawyer Today About Your Planning Options
The attorneys at DeLoach, Hofstra & Cavonis can help you decide which gifting strategy is best for you, helping ensure that your assets will go to the people you care about most. Contact us today to set up a consultation and get answers to your questions, or start reading our free book, Protect Your Nest Egg From The Nursing Home: Your Florida Survival Guide.