Ask the Expert: Gifting and the New Gift and Estate Tax Exclusion Numbers

Evan H. Farr, CELA, Fredericksburg Fairfax Elder LawQ. My son, Eric, recently got married to Jennifer, and my mother, Olivia, would like to give them a gift of $10,000 for their nest egg. She also has a history of giving small monthly gifts to the animal shelter. If my mother requires nursing home care next year (which we think is possible), would she be penalized for the gift she gives to Eric and Jennifer and the recurring donations to the animal shelter?

A. The answer is YES. Gift giving can be a risky venture for people who may need Medicaid coverage within five years.
Medicaid presumes that all gifts made in the 5 years prior to filing for Medicaid were made in contemplation of applying for Medicaid. Individuals seeking eligibility for long-term care Medicaid benefits must disclose all gifts made by the individual or his or her spouse within the prior 5 years. Medicaid presumes that gifts made within 5 years of the eligibility request date were made in order to qualify for benefits.
If you have a history of giving small weekly or monthly gifts to a charity, most Medicaid offices will not construe those to be disqualifying gifts. For instance, in Virginia, these types of regular gifts are not penalized so long as they are under $4,000 per year and there was a regular pattern of making this gift for years prior to applying for Medicaid.

Does this potential risk of a Medicaid penalty suggest that all giving should cease? Not necessarily. However, those who may need nursing home care within the next five to ten years must weigh the joy of giving against the potential cost of losing much-needed Medicaid benefits.
For more information about gifting and Medicaid eligibility, read “Medicaid: The Perils of Gifting FAQ” on Farr Law Firm, P.C. website.

Q. Also, on the topic of gifting, my husband, Mark, and I would like to make gifts to family and charity and are not sure if we should do so this year (in 2013) or next. What are the new gift and estate tax exclusion numbers for 2014 and how do they compare to the current ones? If we do start making gifts, should we come in and update our estate planning and if so, how often?

A. The IRS recently released the gift and estate tax exclusion amounts for 2014. Under the provisions of the American Taxpayer Relief Act of 2012, the exemption increased from $5,120,000 in 2012 to $5,250,000 in 2013 and the tax rate increased to 40%. In 2014 and future years, the exemption amount will continue to be indexed for inflation and the tax rate will remain at 40%. The 2014 lifetime gift tax exemption as indexed for inflation is $5,340,000.

In 2013 you can gift up to $14,000 per person, per year without incurring any federal gift tax. These gifts are referred to as annual exclusion gifts and are not subject to the federal gift tax at all and therefore do not use any of your lifetime exemption from gift taxes. The annual exclusion amount is indexed for inflation but can only increase in $1,000 increments. Therefore, the 2014 annual gift tax exclusion remains at $14,000. However, always beware of making lifetime gifts if you are over the age of 65 — read the Perils of Gifting webpage on the Fairfax and Fredericksburg Elder Law Firm of Evan H. Farr, P.C. website for more details.

For spouses, there is an unlimited deduction from estate and gift tax that postpones the tax on assets inherited from each other until the second spouse dies. Married couples can combine their annual exclusion gifts and gift up to $28,000 per person, per year, but “split gifts” must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.
All together, the IRS posted more than 40 updates for 2014.

Nearly 2.5 million Americans die each year, and many haven’t signed the basic documents needed to protect their loved ones. If you or your loved ones do not have a plan in place, please suggest that they call the Fairfax and Fredericksburg Estate Planning Law Firm of Evan H. Farr at703-691-1888 for a consultation.

Since you have already taken the important step of planning with the Fairfax and Fredericksburg Elder Law Firm of Evan H. Farr, P.C., with all of the changes that have taken place within the past five years, you should revisit your plan this year. Ask about The Farr Law Firm’s Lifetime Protection Program, which ensures that your documents are properly reviewed and updated as needed, so that they will have the proper effect under the law.

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.