Article from Gazette Financial Guide January 2020
The $15,000 figure is a number that many people are familiar with, and yet, it is one of the most commonly misconstrued concepts of estate planning and elder law. Time and time again I hear “my accountant said the IRS lets me transfer/gift $15,000 per year.” That is true, but I say, so what? What is the REASON for doing that?
Most people don’t have an answer. The reason is that the $15,000 gift is intended to reduce your federal inheritance tax which is also known as the “death tax.” But federal inheritance taxes are only relevant if you have assets of $11,400,000 ($22,800,000 for a married couple).
Since most of you don’t have that amount of savings, then why would you gift $15,000 year? Is it to minimize Massachusetts inheritance taxes? You can gift to minimize the Massachusetts inheritance tax, but it does not need to be tied to the $15,000 amount. Massachusetts does not have a gift tax and/or requirement to file gift tax returns.
Is the purpose of gifting to avoid having your estate consumed by long-term care costs? If that is your rationale, then ignore the $15,000 IRS concept. It has absolutely nothing to do with nursing home Medicaid/MassHealth coverage.
The two are apples and oranges. Time and again clients have been denied MassHealth/Medicaid nursing home eligibility because of gifts made within five years of the application. The elder’s child says to me “but the government lets my mom give $15,000 per year,” to which I reply, “that is the IRS speaking to the issue of inheritance taxes.” The IRS does not control Medicaid. Medicaid is a joint state/federal program. The program has strict financial criteria, which have absolutely nothing to do with the IRS. In Medicaid’s view, a gift is a gift.
So, should you gift $15,000 per year if you want to protect assets from nursing home costs? No. You should consider transferring big money, not just $15,000. At the least, consider transferring your house. Gifting cash tends to be a little less tolerable to clients.
Of course, gifting for asset protection and MassHealth has its own inherent problems. These include capital gains tax implications, as well as tax implications for 401ks or other retirement funds that have never been taxed as income. There are also potential issues with the children to whom you expect to transfer the funds. These issues include the exposure to the financial worlds of your children, including potential bankruptcy, estrangement and divorce. Bottom line… you can ignore the $15,000 gift concept unless you are a millionaire many times over.
Author’s Note: The federal “Secure Act” signed into law on December 23, 2019 dramatically changes the rules as to inherited ERISA funds such as IRA’s and 401k’s, particularly as to Trusts. Stay tuned for information on that topic.