THE MANNER OF GIVING is worth more than the gift.

PIERRE CORNEILLE, 17TH CENTURY FRENCH DRAMATIST.

While I highly doubt he was referring to IRS regulations and the laws surrounding financial assistance for the nursing home, Pierre’s words are fitting for this discussion. In this season of giving, ironically there are a few selfish things to consider before you make any significant gifts. Now, I’m not referring to the oh-so-coveted American Girl doll for your granddaughter; think more along the lines of that quarter of farmland to your child, or new car for your grandchild.

What is considered a gift? A gift is the transfer of anything for less than fair market value. I often hear of people wanting to sell something, such as a house worth $200,000, to their kids for a dollar to avoid it being considered a gift. Well, that is a still a gift of $199,999 because it is a sale for less than fair market value. Here are a few examples of well-intentioned actions that are considered gifts that often surprise people: forgiveness of a loan, paying a bill or debt for another, putting a non-spouse on the title to your house or vehicle.

Gift Taxes: The annual gift tax exclusion for 2018 is $15,000. This means you can gift $15,000 per recipient in 2018. For example, you can give $15,000 to each grandchild (Merry Christmas, indeed), but if you give over that amount in one year you have to file a gift tax return (IRS Form 709). However, you will not have to pay any gift tax unless you have already given away millions and millions of dollars during your life.

Capital Gains Taxes: When considering larger gifts, such as the transfer of real estate, it is important to consider capital gains tax. Gifts made during life generally do not receive a step-up in basis for tax purposes. For example, Dad gives Son a tract of farmland; if Son later sells the farmland, he will pay capital gains tax on the difference between Dad’s cost basis (usually low, especially if we are talking family farmland) and what Son sells it for. This can result in a significant tax consequence for Son. Alternatively, if Son inherited the farmland at Dad’s death, Son would receive a step-up in basis for tax purposes. Then, if Son sells the farmland, he will only pay capital gains tax on the difference, if any, between the value on Dad’s date of death and the sale price.

Medical Assistance: If you are currently receiving Medicaid (medical assistance, generally to help cover nursing home costs), or may need to apply in the near future, be very cautious with your gifting. When you apply for Medicaid, you must report any gifts you, or your spouse, has made within the past five years. The transfer of certain assets within five years before applying for Medicaid will make you ineligible for Medicaid for a period of time, depending on the value of your disqualifying transfer. Even small, seemingly insignificant transfers can affect eligibility. As discussed above, while you may gift $15,000 per year, per recipient, without paying gift tax, Medicaid still treats that as a gift affecting your eligibility. Likewise, Medicaid does not have an exception for gifts to charities.

Charitable Giving: Charitable gifting is encouraged and therefore receives more favorable tax consequences. There is no $15,000 limit on charitable giving before the donor has to file a gift tax return. However, a charitable gift may still affect your Medicaid eligibility. There are also some ways to give charitably that will result in better tax consequences. For example, if you are leaving $50,000 to charity at your death, try doing so through pension benefits rather than cash or real estate. A charity would neither pay income taxes nor estate taxes on such benefits, whereas any individual recipient of those benefits would. This is a great way to transfer more wealth at your death.

The laws surrounding how gifting might affect your Medicaid eligibility and impact your taxes are complex. Before applying for Medicaid or doing any significant gifting, please consult with your elder law or tax attorney, and accountant.

Attorney Whitney Irish

practices in the area of estate planning and probate at Vogel Law Firm. She handles all aspects of the planning and preservation of clients’ estates, including wills, power of attorney documents, trust creation and administration, business planning, farm succession planning, complex estate planning, planning for protection of minors, Medicaid planning, guardianships and conservatorships. For more information visit vogellaw.com.