Our clients are understandably concerned about the costs of long-term care. They want to pass something on to their children after working all their life. More importantly, they want to provide for themselves and their spouse if they need to go to a nursing home or assisted living. So, naturally, one of the possibilities is to make a gift.
So, can they do gifting without jeopardizing government assistance with long-term care? If so, what assets are best to gift? This blog intends to provide some answers.
First, if you need assistance with long-term care, the program providing the most help is called Medical Assistance. In other areas of the country, it’s called Medicaid. Each state has their own version of this. For example, in California, it’s called MediCal.
As a general rule, there is a five year look-back period for medical assistance. This means that, when you apply for medical assistance, you will be asked if you have made any gifts within the previous five years. If you have not made any gifts in the last five years, you just move on to the next question. If you have made such gifts, the county will ask when you made the gifts and how much they were. Here are some questions and answers about these gifts:
1.Does the county care who you made the gifts to?
No. They do not care who you made the gifts to. They will not contact the donees (the persons receiving the gifts) about the gifts. They really don’t care what the donees did with the gifts.
2. What does the county do with the gift information?
When the amount of the gifts is disclosed, they will calculate a period of ineligibility. For example, at the present time, a gift of $71,060 will translate into a period of ineligibility of 10 months.
3. What is a period of ineligibility?
This means that you will not receive county help for a period of 10 months. Further, it means that you will have to pay for your own care for the 10 month period.
4. When does the period of ineligibility begin to run?
This is important. The period of ineligibility only begins to run when you meet the eligibility requirements for medical assistance. In other words, the period does not begin to run until you are down to $3,000 in available assets for single person and $123,600 for a married person. In other words, a single person cannot start with $200,000 in assets, give away $100,000 to children, go into a nursing home, and apply for medical assistance. The period of ineligibility will not begin to run until the person’s assets are down to $3,000. The county will deny the application and tell you to reapply when your assets are down to $3,000. However, at that time, they will again deny the application because of the gifts. Who will pay for your care at that time?
Let’s Forget about Nursing Home Care
Now, let’s say you are not worried about needing nursing home care in the next five years. You want to protect some assets for your children and to do that, you decide to make some gifts. What should you give? Let’s say you have cash of $200,000 that you do not need and a small farm outside of town. Are there any tax consequences of gifting these assets?
There are no gift tax consequences of simply making the gift or receiving the gift.
However, the tax code has a concept called “basis.” Every asset has a basis. If you buy a stock for $100, and you sell it for $200, there is a gain. In this example, the basis is $100. The gain is determined by starting with your basis (in other words, what you bought it for) and deduct this from the sales price. In this example, the basis would be $100 and the capital gain would be $100 ($200 minus $100 equals $100.) The term for this is “highly appreciated property.” Cash has a basis equal to its value.
So if you give one child $200,000 in cash, he/she will have no capital gain when they dispose of it. On the other hand, if you give another child a small farm worth $200,000, and you bought it for $50,000, and he/she sells it, he/she will have a $150,000 capital gain. They will have to pay income tax on this capital gain.
In the example above, how much income tax would they pay? Well, it depends on their income tax bracket. On the federal side, they get a break because long-term capital gains (for property held in excess of one year) are taxed at a reduced rate. Typical rates are 15-20%. But, the children may also be subject to an additional medicare tax. On the Minnesota side, capital gains are taxed at the same rate as ordinary income. So, a person in a medium tax bracket could pay a total of 25-33% in capital gain taxes and additional medicare taxes.
In conclusion, people should think before making gifts. If there are low basis assets, will the donees hold on to the property for their lifetime, or will they sell it? When it comes to highly appreciated property, it is better for the done to inherit it rather than receive it as a gift.