As you plan to make gifts in your elder years, you need to know about federal estate and gift taxes, income taxes, real estate law, estate law, wills and divorce law. Your first step should be to consult an attorney.
Your attorney will ask you to gather copies of all federal income tax and gift tax returns, gift checks, recorded and unrecorded deeds, copies of gift letters and trust agreements. After a review of all the documents and a discussion of your goals, you will be ready to select the property to be gifted, with your attorney’s assistance as you make your decisions.
You may want to consider a gift to charity. Many not-for-profit institutions have resources to aid you in making gifts, particularly in setting up a charitable gift annuity, which allows you to give cash or securities while providing you with a guaranteed, lifelong income. Under certain conditions you could enjoy a significant charitable tax deduction without incurring a capital gains tax if you give appreciated securities with a low cost basis. Again, you need to see your attorney to help you to review all your options.
The Internal Revenue Service defines a gift as “any voluntary transfer of property from a donor to a donee without what is called full and adequate consideration”. A gift will be computed when the donor gives up control over the transferred asset. Your gift to anyone during a calendar year will be a “taxable gift” if it exceeds the annual exemption amount. Your payment of educational or medical expenses for another individual is not generally subject to federal gift tax.
The value of a gift for federal gift tax purposes is the “fair market value” of the property transferred. Fair market value is generally defined as the “price which would probably be agreed upon by a seller willing to sell and a buyer willing to buy where both have knowledge of the facts.” Gift tax returns, which list the gifts made in that year which exceed the annual exemption amount, must be filed annually when you file your personal income tax return.
Under the Deficit Reduction Act of 2005, gifts made after February 8, 2006 can make you ineligible for Medicaid long-term care benefits many years after the gift is made. Medicaid caseworks will be looking for gifts going back five years. It is therefore very risky for seniors to make gifts of any size if they might need nursing home care within that window of time. Only those with sufficient resources to pay privately for nursing home care for five years can ignore the new Medicaid transfer penalties. Nursing home care can be very expensive, so most seniors should proceed cautiously before making any gifts. We recommend you speak with an attorney who provides estate planning services on a regular basis.