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Don’t Look a Gift Horse in the Mouth
By Bernard A. Krooks, Certified Elder Law Attorney
We’ve all heard the proverbial saying: “don’t look a gift horse in the mouth.” The proverb is generally understood to mean that you should not be ungrateful when you receive a gift. However, there are many misconceptions about the legal consequences of gifts.
The Internal Revenue Service (IRS) may care about your gift. While many believe that intra-family gifts are a personal matter and need not be reported to the IRS, some gifts you make may be taxable and even if they are not taxable, there might be a requirement that you report the gift to the IRS.
The $15,000 limit that many people have heard of is not an absolute limit on the dollar amount of gifts you may make. It actually is an annual exclusion from the federal gift tax reporting requirement. Thus, if you make gifts to one person in any one year totaling $15,000 or less, not only is the gift not taxable, you do not even have to report those gifts to the IRS. Neither does the person who receives the gift. The $15,000 limit has increased in recent years from $10,000 and is adjusted periodically based on inflation rates. Even if you make annual gifts to one person in excess of $15,000 you will likely not have to pay gift tax, the gifts will simply reduce the amount you can leave to your heirs tax-free on your death. Moreover, the $15,000 limit does not apply to gifts for medical or education purposes so long as the check is made out directly to the provider.
While you may not have to report the gift to the IRS or pay taxes, that doesn’t mean that the government may not need to know about your gift. If you need long-term care in a nursing home in the next five years and you apply for Medicaid to cover the cost of such care, you will have to report those gifts. In fact, those gifts will likely make you ineligible to receive Medicaid long-term care benefits for a period of time, depending on, among other things, the amount of the gifts and who the recipient was.
When you make a gift, consider using a trust. This will allow you to retain some control over how the gift is used.
Under New York law, minors can’t own property themselves. An adult needs to control the property for them until they reach the age of majority. Without proper planning, a guardianship may be needed. This is a time-consuming process and involves court supervision. Consider using a trust, a Uniform Transfers to Minors Act account or some other vehicle to hold legal title to the assets instead of making an outright gift to a minor.
If your gift is for education purposes, consider 529 accounts. These accounts are created pursuant to section 529 of the Internal Revenue Code. Contributions qualify for the $15,000 exclusion, they grow tax-free, and money taken out for eligible education expenses also is tax-free. If funds are not used for any reason, the beneficiary can be changed to a different family member.
Be careful when making gifts to individuals who are receiving means-tested government benefits. Benefits that have income and asset limits could be lost if you make a gift to an individual receiving such benefits. It depends on how much the person receives, what they receive (some property is exempt), and how they receive it (cash is not a good idea).
When gifting non-cash assets, it is especially important to consider the tax effects of such gift. If you gift property, the recipient receives your cost basis in the property for tax purposes. Say you are considering gifting stock which has appreciated in value since you purchased it. If you gift it now, then when the recipient eventually sells the investment, the taxable gain will be based on your cost. If instead you hold the investment and gift it at your death, the recipient gets a basis adjustment to date of death, which often saves the recipient significant sums in capital gains tax. If your estate will be subject to estate tax on your death, then the analysis may differ, and it is important that you obtain professional advice prior to making any gifts.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been honored as one of the “Best Lawyers” in America for each of the last seven years. He is past President of the National Academy of Elder Law Attorneys (NAELA) and past President of the New York Chapter of NAELA. Mr. Krooks has also served as chair of the Elder Law Section of the New York State Bar Association. He has been selected as a “New York Super Lawyer” since 2006. Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.elderlawnewyork.com.