Gifts made by you or to you can not only have tax consequences, but can also affect eligibility for governmental benefit programs.
Join us to learn about the consequences involved when making or receiving gifts. We will cover the estate tax and gift tax aspects of gifts of $16,000, $34,000, a home, and $1 million in appreciated stock. We will also cover the MassHealth, SSI and V.A. Aid and Attendance rules regarding these gifts. We will be joined by our guest speaker Attorney Mark Worthington from Special Needs Law Group of Massachusetts, PC, of Framingham, MA.
In this webinar we will be covering:
– What consequences can giving or receiving a gift have on your governmental benefits?
– What consequences can giving or receiving a gift have on the taxes that you pay?
The opinions expressed in this webinar are the opinions of Attorney Brian Barreira and Attorney Mark Worthington on the law as written as of the date of the webinar recording, January 20, 2022. The information presented in the webinar is for informational purposes only, and is not a substitute for individualized legal advice.
Brian: We’re doing a program today on gift consequences, what are the consequences of making or receiving a gift but mostly this is about making a gift. My friend here Mark Worthington from Special Needs Law Group of Massachusetts is here with me. Mark has been the uh- Mark really knows tax law very well. You were the director of the federal tax- go ahead you introduce yourself.
Mark: Oh, I’ll introduce myself. Hello, yeah so amongst the things that only my mother cares about- um I have an LLM in tax from BU as does Brian. That’s a law degree in case you don’t know on top of a JD. I was director of the LLM program at Western New England University Law School in elder law and estate planning and I’ve been teaching there excuse me also as an adjunct and I’ve been teaching there since 2005 although I’m a mere adjunct now I’m no longer a full-time professor there. A certified elder law attorney like you Brian, i don’t know what else.
Brian: that’s good enough.
Mark: Lots of stuff that nobody cares about-
Brian: You’re qualified to talk about these tax issues so- but the way we’ve divided this up is, I’m going to deal with government benefit kinds of issues and Mark chime in if I say something that’s too broad or too narrow, and Mark’s going to deal with the gift tax and estate tax issues. There are some other tax issues floating around in there so we’re going to start small with smaller gifts and work our way up we only have a half hour so let’s get rolling. So, what the first question is- ‘what are the results if an unmarried person makes a gift of sixteen thousand to a child.’ Let’s start with tax.
Mark: Well sure, so on its face, what happens is nothing. It’s a gift there’s no gift tax on it because the federal annual exclusion amount for making gifts is sixteen thousand dollars, but what you didn’t say in your question is, is that the only gift that year that was made, so assuming that it was sixteen thousand dollars and that’s it for that calendar year- that’s the only gift from that donor person the parent to that donee the the child -then it’s completely covered. There are other things that go along with it which we’ll talk about later like carryover basis I imagine we’ll get to. I do want to toss in a couple of quickie points though that you know we hear that people say things like oh I know I can’t give away any more than it was fifteen thousand dollars last year now sixteen thousand dollars – well sure you can you can make gifts of any amount, the only issue is what are the consequences? And, most people I think are surprised to learn that there is such a thing as a gift tax, there is federally not Massachusetts though but it does have an impact anyway on Massachusetts estate tax.
The annual exclusion amount was designed to take into account ordinary life it was not designed so that you could make all kinds of birthday gifts and holiday gifts and stuff and then write a sixteen thousand dollar check to that same person. Creation of joint tenancies can be a subject to the gift tax and I think maybe one of my favorites is when somebody says to me, “well I didn’t make a gift, I sold that property to my son for a dollar.” Well the IRS didn’t just fall off a turnip truck pardon me so yeah they know that you made a gift. So, all right that’s my little answer there.
Brian: So does the recipient of that sixteen thousand dollar gift get taxed?
Brian: No, okay
Mark: One thing that’s really but look it’s really important to understand something- in tax law if I get something, it’s either a gift or it’s taxable income, but it’s never both, it may also in some cases simply be a return of principle to me like you know if I’m getting an annuity payment part that’s return of principle but something will not be both a gift and income and in this case it’s a gift.
Mark: Oh Brian, I’m supposed to remind you disclaimer stuff.
Brian: Oh well yeah, we’re talking in general here no one should you know rely on everything we’re saying as though it’s legal advice that applies to you. I mean we’re trying to cover a lot of different issues here.
Mark: Right, so we necessarily have to leave out some details that may matter for your particular circumstance and most importantly we’re not your lawyers even if one of you listening is a client in this session we’re not your lawyers we’re not giving you legal advice.
Brian: Okay, so now we’re going to take that $16,000 gift you made to a child and I’m going to run through some of the government benefit programs very briefly. So first, I’ll just quickly say there are certain housing programs like elderly housing where you’re not penalized for making a gift but – for the next two years it’s – treat – they impute income from the asset that you gave away as though you hadn’t given it away when they’re calculating your rent. I’m going to leave it at that first, there are probably other housing program issues out there if you’re dealing with housing you’re going to have to really dig deeply into that.
SSI, if you’re on SSI and you make a gift, we take the amount that you gave away we divide by the amount you were receiving and you’re penalized for that number of months, they round up. The penalty starts running the month after the gift but for a maximum of of three years.
MassHealth, this is the big one, any gift you make can cause a penalty period, now the the rule is the state is supposed to calculate what the average cost of nursing home care is. They are doing a job of keeping the number low by the way they’re doing it and they’re claiming it’s $410 a day. So you give away $16,000, divided by $410, round the number up, you’re disqualified for 40 days. The 40 days though doesn’t start when you make the gift, it starts when you’re otherwise eligible for MassHealth which means you’re practically out of money. Effectively, that means that the recipient of the gift has to either give it back or pay for the facility for that period of time if you’re in a nursing home. I think you’ll find in many cases that the cost of the nursing home for that 40 day period would be more than the gift. So, a lot of times it makes sense to just put the money back.
Finally the V. A. Aid and Attendance program. This is something that a lot of people don’t know about. It’s for wartime veterans generally speaking, you didn’t have to serve except for the early part of the Vietnam Era, you didn’t have to serve in the war as long as you serve during war time. There’s an amount that a married veteran can get over $2,400 a month if you’re homebound and you have essentially a cash flow problem, The surviving spouse can get over $1300 a month, so this is a really good benefit that a lot of people don’t know about. About four years ago, Congress put in a penalty for making gifts and it’s very complicated. There’s a three year look back, usually when there’s a look back period in a government program that’s the maximum penalty period or often that’s the maximum penalty period but here there’s a three-year look back but the penalty can be up to five years. So they take the amount you gave away, divide by a number that changes every year it just changed, but they only look at – there’s a cap on how much you can keep and right now that number is $138,489 excluding your home. So you make a gift of anything above that they divide by 2431 and that’s the number of months that you’re penalized for. This benefit rounds down, so you know there’s every one of these programs has a different rule roundup start next month start last month you can’t rely on anything you hear when you can’t apply what you’re here about one program to another. That is a quick quick summary of V. A. Aid and Attendance but it’s really something that people should be looking at if they’re eligible for it because it’s essentially free money it can help keep somebody at home or in assisted living. Mark do you want to add anything about that any other –
Mark: Just real quick, you know we focus a lot in our conversations on MassHealth for nursing home care but most people on MassHealth, you know they’re under 65 and they’re not on a certain kind of MassHealth called home and community-based waiver services. So if you’re kind of just on plain vanilla MassHealth and you’re under 65 there’s not only no asset limit on what you can have that there are income issues but no asset issues and at the same time since there’s no asset issues they don’t care if you give away anything. You can make gifts without penalty for those kinds of MassHealth.
Brian: Right, great thank you for clarifying that. So, on to the next type of gift now we got a married couple giving away thirty four thousand to her child. Your turn.
Mark: Oh my turn again, okay, well both spouses have the sixteen thousand dollar annual exclusion that they can use. So it sounds kind of easy, it’s like ‘hey you know, fine that that now our limit is uh $16,000 times 2 right which is $32,000.’ So, we have, we’re in excess by two thousand dollars here, right? So, they can if they were let me just quickly say if they were under- say they wanted to give away thirty thousand they’re within the exclusion the IRS has some weird rules about “gift splitting” so if they each wrote a separate check for you know fifteen thousand bucks they’re fine. If they don’t, if one spouse decides to make the gift of thirty thousand dollars from that spouse’s separate account then the IRS wants you to file a gift tax return in the next year- form 709 IRS form 709 and both spouses have to file it and both spouses have to assent to the “gift splitting” in order to make that work. Question is, what if one spouse writes the check for $30,000 and it’s from a joint account? I think the answer is still the same but most people don’t, I think most people don’t care if it’s from a joint account they don’t care who writes the check this one was for thirty four thousand dollars so you’ve got a two thousand dollar access amount or if there’s no consent to give splitting you’ve got a 18, I guess, $18,000 access amount and a form 709 needs to be filed by April 15th the next year reporting the gift. So, you have the amount that’s excluded let’s say it was $32,000 the other two thousand dollars is a taxable gift. If you’re electing gift splitting that would be a thousand per spouse and what’s the effect of that? Well there is a gift tax payable but only if the gifts that you make in excess of the annual exclusion and a couple of other exclusions exceeds during your lifetime 12.06 million dollars per individual. God bless you if you have that problem. The effect however of the excess amount here, a thousand dollars per individual, per spouse in this case, is there’s no tax due now because you’re using up that 12.06 million dollar exclusion, but the effect is in this case to reduce for each of the spouses the amount that they can pass free of federal estate tax by a thousand dollars.
Brian: Let’s get to the Mass estate tax, how does that-
Mark: The Mass estate tax is weird so if you’re making tax- so Massachusetts has no gift tax period. But it does affect the the Mass estate tax and the way it does it is this, let’s say that you had I’m going to just change the example a little bit let’s say you had a single person 1.1 million dollars the Mass estate tax threshold is a million dollars, got to pay tax on anything over that when you die. Well if you gave, so let’s say this individual gave away $200,000 brings their estate down to $900,000. Well, when they died they gave away $200,000, now their Mass exemption is no longer a million it’s $800,000, the effect of it will be to slightly lower the amount of estate tax that they will have to pay, but it didn’t get rid of it just because they got their estate under a million bucks.
Brian: All right, we’re gonna we’re gonna get back to another example of that later on so let’s go on to MassHealth. Everything the two of us said about MassHealth before is the same on this gift. A gift by one spouse causes a problem for another spouse if we’re talking about long-term care. There’s something known as a cure, if the child receives 35/34 grand and one parent goes to a nursing home there’s going to be a penalty period. The child can give back the money but the regulations say the money has to go back to the parent who made the gift, So, if you give the money back to the wrong parent it may not fix the problem. It’s one of those strange things in MassHealth, MassHealth is full of strangeness. All right, so moving on, Mark to, what are the results, unmarried person pays education and medical expenses directly for a child, and then I’m gonna throw another twist in there and say what if the parent reimburses the child for those expenses.
Mark: So, this is called the the unlimited med-ed exclusion amongst us who do this sort of stuff for a living and it means that you can pay for any person, not just a child, you can pay their tuition, not books not lab fees, tuition for any education doesn’t have to be higher education it can be you know tuition for kindergarten or whatever or medical expenses and that includes health insurance premiums. You pay for anybody in any amount and shall I anticipate your next, what you said like what if you say oh well you know ‘my kid already already wrote a check for the tuition, I’ll reimburse my kid’, that fails. The payment has to be directly to the provider, the educational institution, the medical institution, the health insurance company.
Brian: Okay all right the MassHealth result here; well it’s still a gift MassHealth can still penalize you but there is an exception in the MassHealth gift rules. If you do something for purposes other than planning for MassHealth it can be accepted as an acceptable gift. It can be, now, so,
Mark: But be prepared to duke out with MassHealth on that.
Brian: Right, well you know people- for one thing if you’re paying someone else’s medical bills then there’s probably a problem there and the people who- some of the hearing officers will look at that. Some you know, when you file an appeal it’s just sort of a crap shoot, you enter the lottery, you might get a hearing officer who believes in, who likes people and you might not or you might not get that kind of hearing officer. So, if it was inadvertent you need to come up with evidence. All right so let’s move on, unmarried person deeds a half million dollar house to a child. Tax consequences?
Mark: Well in in terms of the you know the gift tax issues we already covered that okay that’s all the same it does qualify for the annual exclusion etc etc no federal gift tax unless you’ve already given away close to 12 million bucks et cetera et cetera. By the way, that $12.06 million number for federal gift tax and estate tax exclusion, if nothing else changes, the law reverts that number back on January 1, 2026 to around $6 million so be aware of that if your net worth is high enough to care about that sort of thing. Now if the house- So you give that and one of the things that happens is that the donor, the parent now no longer qualifies for the $250,000 capital gains tax exclusion that you can get. If you sell a home, your primary residence and it’s been your- well doesn’t have to be your primary residence at the time, but if it has been your primary residence for two out of the last five years and you’ve owned it for two out of the last five years or more then you get this nidokine exclusion. So the only way it would qualify after that transfer would be if at the time of the sale the donee child met the two out of five-year qualification for primary residence and ownership. Now, another thing to know is that if you do that, if you just give away this home outright and you’re out of there, then you’ve made a completed gift for both gift tax and estate tax purposes, and then when you die that home does not get what’s called, sometimes a little inaccurately, the step up in basis at death. So any appreciation that there was is going to be taxed when the child eventually sells. Now, there’s an exception, one exception to that which is that if you just keep on living in the house, you have retained the possession the in fact- not a legal ownership, right, but you retain possession and if you move out of that house and stop using it as your own and you do so within three years of your death, it will be includable in your taxable estate and it will get the stuff up in basis.
Brian: Okay, all right, MassHealth issues on this, MassHealth long-term care, it’s a gift it’s $410 a day the amount given away divided by 410 that’s the penalty period. But, if a child is considered disabled, which means eligible for social security disability or SSI, or is a caregiver who’s lived in the house and MassHealth has certain strict regulations on that then that can be accepted. It can be an exception to the law, to the current penalty.
Mark: Yeah, penalty free transfer
Brian: All right, so we are almost out of time, a gift of a $500,000 home to your spouse? That’s not taxable if your spouse is a U.S. citizen if you and your spouse are a U.S. citizen you don’t have any any problems and MassHealth doesn’t have any problems with that. I think the problem here is what if one of them is not a U.S. citizen, go ahead Mark.
Mark: All right, yeah sure if the donee spouse is not a U.S. citizen and the transfer was made on or after July 14, 1988 then you don’t have an unlimited gift tax marital deduction, instead you have an annual exclusion for that spouse but the the annual exclusion amount instead of being sixteen thousand dollars is a hundred and sixty two thousand dollars this year and it’s adjusted annually for inflation. You also need to be extraordinarily careful about creating joint tenancies where the United States citizen spouse takes an asset and now changes the ownership so it’s held jointly with a non-U.S. citizen spouse. And you know, non-U.S. citizen by the way think broadly it doesn’t just mean you know somebody from halfway around the world it can be somebody from Canada which we see a lot and who has never become a U.S. citizen. So we won’t get into the details there but it can be like if there was a establishment of a joint tenancy in a bank account of $500,000 that would be a gift of $250,000 immediately to the non-U.S. citizen spouse but only $162,000 of that is covered by the annual gift tax exclusion and what couple doesn’t, as a matter of fact, I mean the vast majority of couples in an ordinary course, they’re not keeping track of this stuff. I mean there is money going here money going there, opening this account closing that account, they can rack up an enormous amount of taxable gifts in the process of doing that. What I just said does not apply to establishing a joint tenancy with the non-U.S. citizen spouse if the property is, if the asset is real property. No gift has been made at all.
Brian: All right, so we got one last example here and then I’m going to quickly talk about trusts at the end. What if an unmarried person or a married person gives away 2 million in appreciated stock to a child? We’ve covered a lot of this, I think the point of this is to stress that there’s no mass gift tax and- but go ahead Mark.
Mark: Yeah sure, so here like if we just have this single individual gave away two million bucks what it does is that it reduces that individual’s ability to pass assets free of federal estate tax by two million dollars-ish. I mean some of it would be uh subject to the sixteen thousand dollar annual exclusion. And so really for federal estate tax purposes what it would do is it would reduce the estate tax exclusion of $12.06 million and it would reduce it by one million nine hundred and eighty four thousand bucks. The Mass estate tax, this would reduce the threshold from Mass estate tax down to I think you know, embarrassed to say I can’t remember, it’s either $60,000 or $90,000 I think it’s 90, and so if this person for example was married- and should I go into that?
Mark: Okay, this person was married they could leave $90,000 to any old kind of a trust or to a kid or something like that and if the rest of it was left to the surviving spouse or left to a marital deduction trust for the surviving spouse the Mass estate tax would be zero on that individual’s death. And then the surviving spouse can eliminate the estate tax by the expediency of moving to Florida or any one of a number of other states where there is no estate tax. Let’s see did I oh and – basis yeah so basis, all right, so let’s just talk about basis here, I don’t think we really need to hit the married person scenario right this is just yeah. So when you give away an asset you give away three things, you give away the asset, you give away your basis in the asset, meaning if you sold it what would be excluded from determining the capital gain on the asset, and you also give away whether or not the asset has been held long term or short term which can affect the tax rate. The other thing I wanted to get into there is that sometimes people give away assets that are under water, meaning that the basis, what they paid for the asset or their basis in it, is greater than what it’s worth now. If you give away an asset that you paid 100 bucks for and you give it away when it’s, you know, the stock’s gone down or whatever and it’s now worth 60 bucks, you give it to your kid, if your kid turns, and then let’s say the market goes up to 80 bucks, your basis for determining loss is 60 bucks. So you didn’t get a carryover, exactly.
Brian: Right so somebody who wants to give away stock that’s down in value should sell it and use the loss on their own return.
Mark: yeah, right and then give it away.
Brian: Yeah, so typically somebody’s not giving away, now I’m going to deal with MassHealth very quickly, typically you’re not giving away two million dollars in appreciated stock to try to get on MassHealth. But, there could be someone with maybe a long-term diagnosis of Alzheimer’s who’s going to make large gifts like this so this, you have to sit down with tax professionals about this because sometimes it makes sense for the parent to sell before giving it away and sometimes it makes sense to give it away. Now the child can pay for the parents care and can potentially treat the parent as a dependent and use all the payment, many of the medical payments, as itemized medical expenses. So, when you’re doing this kind of planning with large amounts of money you got to look at that before you do anything. All right so we’re just about out of time you know a lawyer I know was interested in joining and watching and after I had the outline he started, he sent me some questions about gifts to trusts. So that’s a whole other, another webinar I mean dealing with trusts, but generally speaking if you make a gift to a revocable trust that’s still you for tax reasons, you didn’t really make a gift, a taxable gift. If you make a gift to an irrevocable trust many times that is a gift but if you keep certain powers over the trust it might not be a gift. If you set it up in trust for your spouse that might not be a taxable gift depending on how the trust is structured for your spouse. Is that enough Mark?
Mark: I think just the the big thing people should know is that if you’re making a gift to an irrevocable trust and it is a completed gift, usually, not always, but usually it does not qualify for the annual exclusion.
Brian: Right, okay. Well Mark, I think we did it. We didn’t cover everything so whoever’s listening or you know this is going to be, this is being recorded so somebody might be watching afterwards, this is the law as we know it on January 20, 2022. I mean Congress can change laws, Massachusetts can change laws, but you gotta, before you make a large gift, you’ve got to look at all the consequences and that’s the bottom line. Thank you for joining us Mark –
Mark: Thank you.
Brian: We’ll do it again on some other tax topic in the future.
Brian: Thank you, bye.