Gifting for those who can afford to gift
If you have a million or more in assets and are trying to decide whether and when to gift during your lifetime or after your passing, this column is for you. Often the possibilities are overwhelming but here are some considerations. As a cautionary note, this column is for very high asset individuals who are not concerned about Medicaid penalties during the five-year lookback period. If you do not know the background on the five-year lookback period, you can consult prior columns of mine here on my website.
- Do you have enough to cover your current and future needs? If you intend to move to a retirement community at some point, you should include this expense in your plans and factor in the long term cost. Also consider that you and your spouse might live longer than expected.
- Who do you want to benefit by the gift. Do you have children in need who would benefit now rather than by waiting until after your death? Would your gift spur the child to action or cause him or her to become dependent on gifting? Do you have grandchildren who will need money for college or who are buying a house or getting married? Are there charities that you want to benefit and you would rather see the results of your gift now than have it left to them in a Will?
- How do you want to gift? Do you want to give cash outright or in trust? Do you want to contribute to a college fund such as a 529 plan? Is the individual you want to benefit receiving or could he or she in the future be receiving government benefits? If the child or grandchild is currently or could be on SSI or Medicaid, he or she could lose benefits by receiving your gift outright. Consult an elder law and special needs attorney if not sure.
- What are the tax consequences of gifting? Often individuals and couples who are considering gifting are intimidated by misunderstandings regarding the annual exclusionary amount under the Unified Estate and Gift Tax. They believe that the government does not permit them to gift more than $14,000 per year. This is not true. The annual exclusionary amount indicates the sum that can be gifted per person without the necessity of filing a gift tax return by the following April 15. You can give $14,000 per person without it being considered part of your estate at death and without filing a gift tax return on the following April 15. This is extremely generous. If you are married you and your spouse can each give $14,000 to each individual recipient without needing to file a gift tax return. This means $28,000 could be gifted to each of your children, your children’s spouses, your grandchildren and so on without the necessity of filing a gift tax return. Even if you exceed this and file a gift tax return for larger gifts, you almost certainly do not owe gift tax when you file the return. The unified credit for the estate and gift tax is $5.43 million per person and, with portability for you and your spouse it could amount to $10.86 plus inflationary increases.
- The taxes to consider are capital gains taxes and Pennsylvania inheritance taxes. If you give cash, there are no capital gains consequences. If you give what are referred to as highly appreciated assets, the recipients, if they are not charities, are generally better off inheriting rather than being gifted to during your lifetime. A house purchased for $30,000 and gifted years later and then resold by the recipient for $350,00 could result in capital gains taxes up to $320,00. If inherited, there would only be capital gains taxes for the increase in value between death and sale. The same reasoning applies to stock and similar assets. On the other hand, if you gift to one or more charities, charities and you can take advantage of their tax exempt status and save taxes and give you a lifetime income. It is worth considering.
As to Pennsylvania inheritance taxes, a gift would only get the property out of your estate if you live for another year.
There is no one size fits all when it comes to giving. Get professional help if you need it.
Tune in on Wednesdays at 4:30 p.m. to radio WCHE 1520, “50+ Planning Ahead,” with Janet Colliton, Esq., and Phil McFadden, Home Instead Senior Care.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.