Case Estate Law

Cape Cod | Martha’s Vineyard | Nantucket

Cape Cod | Martha’s Vineyard | Nantucket

Many of our clients want to know if and how they can safely gift money to their children and grandchildren. What do they need to know about gift tax? What about the Medicaid 5-year lookback period? 

Many people know that there is a certain amount that they are “allowed” to gift each year without it being a taxable gift. Federally, $14,000 (also known as the annual exclusion) is the amount that can be given from one individual to another without incurring a gift tax. That amount is on a “per person” basis, meaning that you could walk down the street giving out $14,000 to every person you meet, and no gift tax would ever be incurred. But what does that actually mean? Is there a tax that is paid if you gift over that amount in a given year, and if so, who pays the tax?

In 2017, each individual has a federal lifetime exclusion of $5.49 million, to either use on taxable gifts or assets left upon death, before any federal gift/estate taxes would be due. So, if you happen to give over $14,000 to a certain individual, you would only have to pay a gift tax if you had already given over $5.49 million of taxable gifts in your lifetime! And remember, taxable gifts are only those gifts over $14,000 that were given to a certain individual in a given year, which requires the filing of a gift tax return (709). Also, if any gift tax is ever due, the tax is always paid by the gift-giver, not the gift-receiver.

So is there any harm in Massachusetts residents making gifts of over $14,000/year when it comes to gift and estate tax? Though Massachusetts does not have a gift tax, any federally taxable gifts are brought back into the gift-giver’s estate when they pass away to determine whether they had a Massachusetts estate tax due, so be careful! It’s also important to note that the Massachusetts’ estate tax exemption is only $1 million, which is much lower than the federal exemption amount.

Lastly, when thinking about the possibility of needing long-term care in the future, and thinking about Medicaid (MassHealth) eligibility, always remember that any gift, not just gifts above $14,000, is subject to a 5-year lookback. The 5-year lookback means that when you apply for MassHealth, any gifts or transfers of assets (other than to a spouse) made within five years of the date of application are subject to penalties and potential disqualification.

So, to gift or not to gift? Gifts are a good way to provide for loved ones in need, but always be wary of the gift traps mentioned above. For more discussion about gifts and your particular circumstances in regards to estate planning and/or elder law, please contact a Cape Cod Estate Planning Attorney at Case Estate Law, P.C. at (508) 790-3050 to schedule a consultation!