Traditionally, giving assets away while still living was done in an effort to minimize tax liability at death. However, with the federal tax exemption amount at $11.4 million and growing each year with inflation indexing, federal estate taxes apply to very few people, reports Kiplinger in the article “To Gift or Not to Gift.” The federal exemption is scheduled to fall to about $6 million per person in 2026, unless Congress makes changes to the law. However, even then, only about 0.2% of Americans will pay federal estate taxes.
Therefore, taking action to avoid federal estate taxes is not a top priority for most of us. However, you still need an estate plan to address asset distribution, state taxes and long-term care planning.
Twelve states and the District of Columbia currently have a state estate tax. Their exemptions are not as generous as the federal exemptions. Gifting can help reduce the state estate tax liability. For example, in Massachusetts, lifetime gifts are not subject to the Massachusetts estate tax. Making gifts reduces the value of the estate and lowers the state estate tax.
Before giving away assets to reduce state estate taxes, you’ll need to bear in mind the issue of unrealized capital gains and the step-up in basis. At death, the fair market value of most assets becomes the tax basis of those assets. Because many assets appreciate, the basis of assets is said to “step-up” to the fair market value, which can wipe away all potential capital gains taxes.
Giving can protect assets from having to be spent down to qualify for Medicaid to pay for nursing home care. If there is no long-term care insurance policy in place, there are two other options to pay for nursing home care. You can pay for it yourself, or, if you qualify, you can apply for federal Medicaid. However, to qualify, you’d have to have very little countable assets: $2,000 for a single individual in a nursing home and $128,000 for a married couple with a healthy spouse living at home. There is also a five-year look back period, where Medicaid looks at five years of financial records to be sure you haven’t given away assets that could have been used to pay for nursing home care. Assets given away more than five years before an application is made are not countable. These gifts, including the family home, can be saved for loved ones.
What about the simple joy of giving? Many want to help loved ones, while they are alive, to witness what their loved ones can do with their generosity. A down payment on a first home, paying down a student loan, or helping with challenging expenses is a welcome way to help family members. Do give thought to your gift: does the use align with your intentions, could it be waylaid by a divorce or will creditors pounce on it?
There are requirements for gifts, in particular gifts in excess of $15,000 per year, to the same recipient usually require that a gift tax return be filed, even if there are no taxes due. As long as your total gifts during your life as less than $11.4 million, you will not owe a gift tax. However, you will need to file a gift tax return when you file your income tax return to report the use of the exemption during your lifetime.
Speak with your estate planning attorney before making significant gifts to be sure that there are no unintended consequences for you or for the recipient.
Reference: Kiplinger (September 10, 2019) “To Gift or Not to Gift”