This time around, your neighbor is incorrect for a few reasons. Under most circumstances, you do not want to give assets away before your passing. In my experience in elder law, you never know how long you might need to draw on your assets for care, medical expenses, etc. You don’t want to be in a situation where you need additional finances and no longer have access to them. In addition, there is no inheritance tax in most of the United States, which means your children will not get taxed on any properties or assets you would bequeath to them.
There is a difference between gift tax rules and Medicaid gift rules. The gift tax is a tax on money you give away during your lifetime. However, you are allowed under IRS rules to give away at least $15,000.00 per individual without needing to use your exemption or file a IRS Form 709 Gift Tax Return. The current individual exemption is $11.58 million. Any amount over the exclusion amount must be reported and once your exemption amount is used up, any gifts beyond the exemption will be subject to the gift tax.
There are also income tax reasons why you would not want to give money to your children now. If you give an asset away like real estate, the recipient of your gift will receive your tax cost basis (what you paid) for that asset. If your son or daughter receives the asset upon your passing, he or she will receive your date-of-death value in the asset. If your son or daughter sold the asset the day after your death, they would likely recognize no capital gains tax. As you can see, there are significant income tax benefits to waiting until your passing for assets to pass to your loved ones.
Unlike tax laws, Medicaid views gifting very differently. If you have limited financial resources or Medicaid eligibility is a concern, then you also don’t want to give assets away before end of life. Medicaid has a five year look back on impermissible transfers. In sum, Medicaid does not permit you to give money away to become eligible for the benefit. There are several exceptions to this rule, but you should consult with an attorney as even a minor failure in execution could cause negative consequences or even be considered fraud.
Not all gifting is bad (hello birthdays presents!), but you should consult with an experienced estate planning and elder law attorney prior to making any large gifts in order to minimize the risk of unintended consequences.
