Legal-Ease: Law on gifts


LEGAL-EASE

By Lee R. Schroeder - Guest Columnist



Lee R. Schroeder

Lee R. Schroeder


As the end of the year approaches, people often consider giving gifts to others. Sometimes, this gift-giving coincides with the Christmas holiday or birthdays. Other times, gifts are simply annual traditions.

The law on gifts is often misunderstood. Most people have a rough recollection of sometime hearing that each person can gift up to $10,000 or $12,000 per year without tax. This statement is somewhat accurate in principle but very misleading. The statement is based upon the federal gift tax exclusion amount, which is $15,000 in 2019.

In reality, the law provides that any one person can give away $11.4 million in total while alive or after that gift-giver dies (through a will or trust), without any of part of that $11.4 million of gifts being taxable to either the gift-giver or the gift-getter.

The annual gift tax exclusion amount ($15,000) is the amount that is essentially considered “too small to justify the paperwork” by the IRS. For example, if I buy a friend a cold beverage, I technically gave my friend a gift worth a couple dollars. If that gift of a beverage along with all other gifts of all sizes are required to be accounted for, we would each spend forever to complete form after form to document our every interaction with every other person in the world.

Instead, the IRS says that any one person can give any other one person up to $15,000 per year (in total, among all gifts) without any tax obligations and without even telling the IRS. If a person (gift-giver) gives any other one person more than $15,000 in a year, the gift-giver is only required to file a very simple “informational” report (called a gift tax return), which deducts the amount of the gift from the gift-giver’s lifetime, tax-free gifting total of $11.4 million. There is no tax owed.

Thus, I might give my dad $400,000 this year (and I would certainly do so, if I had $400,000). My dad would pay no tax. I would pay no tax. And, I would file a gift tax return that would inform the IRS that I can only give away $11 million more in my lifetime (or after I die) before I (as the gift-giver) must pay tax.

In other words, almost all of us could give away almost everything we have and not pay a penny in tax.

However, despite gifts’ lawfulness and tax-free character, gifts may not be advantageous in the context of long-term care (nursing home) planning. This is because Medicaid’s five-year lookback period considers literally all gifts (of all sizes) given in the preceding five years before an institutional (nursing home) Medicaid application.

Thus, I could give away $20,000 of gifts in the year before I apply for Medicaid. I would have no tax obligations whatsoever. However, Medicaid would treat the $20,000 value of those gifts as creating a period of ineligibility that I will have to address.

In summary, the IRS almost never cares about gifts. Medicaid almost always cares about gifts.

Lee R. Schroeder
https://www.limaohio.com/wp-content/uploads/sites/54/2019/11/web1_Schroeder-Lee-RGB.jpgLee R. Schroeder
LEGAL-EASE

By Lee R. Schroeder

Guest Columnist

Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.

Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.

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