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Estate Planning & Medicaid Planning- Grandparents Generous Gifting

In the season of giving (December) the last thing parents and grandparents have on their minds is the gift tax or the generation skipping tax. I can almost hear it now. The concept of the gift tax is hard enough to wrap your mind around. What, in heaven’s name, is the generation skipping tax?

The generation skipping tax on display. Giving property or money to a grandchild can have a tax consequence (generation skipping tax):

EXAMPLE: Grandmother gives the family vacation home to her only grandchild. She prepares a new deed from Grandmother to grandchild, the grandchild accepts the gift, and the new deed is recorded in the County Clerk’s office (where deeds are filed). Grandmother has made a taxable gift. More specifically, in tax code language, Grandmother has made a direct skip to a skip person. i

EXAMPLE 2: Grandmother gives a check of $20,000.00 to her only grandchild. She puts the check in an envelope and hands it to her grandchild when she sees grandchild during the holidays. Grandmother has made a taxable gift. Again, Grandmother has made a direct skip to a skip person.

What is a direct skip? It is defined as a transfer to a skip person that is subject to Federal estate or gift tax.

What is a skip person? An individual assigned to a generation more than one generation below that of the transferor.ii

What is the tax? The federal government imposes taxes on gratuitous transfers of property made during life to grandchildren and more remote descendants that exceed the exemption limits so transferors cannot avoid transfer taxes on the next generation by “skipping” a generation.

What is the exemption limit? In 2015 the limit is $5,430,000.00 and in 2016 it will be $5,450,000.00.

Does this mean if the gift is less than $5,430,000.00 I don’t have to worry myself? NO. Why? Because if the gift is greater than $14,000.00 (the annual exclusion amount) a tax return must be filed by the 15th of April in the year following the taxable gift. A tax may not need to be paid, but a return must be filed.

In the examples above, how do the gifts affect Medicaid eligibility? If the gifts were made within five years of an application for Medicaid – they will likely punish Grandmother from being eligible for Medicaid for a period of time depending upon the value of the gifts.

To be continued ….
Aaron E. Futterman, CPA, Esq. is a partner in the law firm of Futterman & Lanza, LLP with offices in Smithtown, NY and clients throughout Suffolk, Nassau, New York City, Westchester and Rockland Counties. He concentrates his practice to Elder Law, Medicaid Planning, Medicaid Applications, Estate Planning, Probate, Estate Taxes, and Estate Administration.

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