How do lifetime transfers of my assets affect my estate taxes and Medicaid eligibility?

with No Comments

You should carefully consider gifts and understand their consequences.  The federal gift tax and estate tax are integrated into one unified tax system, the unified credit.

For example, if you exceed the annual gift tax exclusion amount in any year, you can either pay the tax on the excess or take advantage of the unified credit to avoid paying the tax.  The unified credit enables you to give away $5.34 million (in 2014 – adjusted for inflation annually) during your lifetime without having to pay gift tax.

However, using the unified credit during your lifetime by making gifts will reduce the amount available to offset the federal estate tax upon your death.  If, however, you pay the gift tax, such taxed gifts are added back to your estate, and the estate tax is recalculated, with the gift taxes you previously paid credited against any final estate tax due.

There is now permanent portability between spouses.  This allows the surviving spouse the opportunity to take advantage of any unused estate and gift tax exemption left by the first spouse.  The portability option must be selected when the estate tax return of the first spouse is filed, even if no federal estate tax is owned.

You can give $14,000 in a year to each individual and to as many individuals as you want without triggering the gift tax.  In addition to the annual exclusion amounts, you also can give the following without triggering a gift tax:  (1) Charitable gifts, (2) Gifts to a spouse, (3) Gifts to a political organization, (4) Gifts of educational expenses.  These are unlimited as long as you make a direct payment to the educational institution for tuition only.  Books, supplies and living expenses do not qualify, (5) Gifts of medical expenses.  These are unlimited as long as they are paid directly to the medical facility.

Oregon does not tax lifetime gifts.  This creates an opportunity to use lifetime gifts to reduce your taxable estate below the $1 million taxable threshold in Oregon in the right circumstances.  You will need to balance avoiding Oregon estate tax with potential capital gains tax, however.  If you make a gift of a capital asset, the recipient receives your cost basis.  If, however, the recipient receives the capital asset at your death, the recipient receives a stepped up basis to the date of death valuation.

Under state and federal Medicaid rules, if you transfer assets within five years of applying for Medicaid you will be ineligible for a period of time.  This transfer penalty is calculated based on the amount transferred.  Although federal law allows an individual to gift up to $14,000 a year in 2014 without having to file a gift tax return, Medicaid law would still treat the gift as a disqualifying transfer.  There are some transfers that are exempt from the disqualifying transfer rules.  You can transfer any amount to your spouse, your child who is disabled or blind, or a trust for the sole benefit of anyone under age 65 who is disabled.  You may also transfer your home to your child under age 21, your child who lived in your home for at least two years and provided care for twenty hours per week that allowed you to remain in your home before you went into care, or your sibling who had an equity interest in the home and was residing in the home for at least one year immediately before your going in to care.

An experienced estate planning and elder law attorney can help you understand the consequences and opportunities when making lifetime gifts. Contact the Elder Law attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.